Directors’ Loans in 2025/26: Tax Rules, Pitfalls and Planning
Directors’ loan accounts (DLAs) can be useful tools for managing cash between company and personal finances — but they are also closely monitored by HMRC. If not used carefully, a director’s loan can trigger unexpected tax bills for both the company and the director.
In 2025/26, with company cash flow tight for many small businesses, it’s more important than ever for directors to understand how these loans work, what the tax rules are, and how to avoid the common traps.
This article explains how directors’ loans are taxed, when extra charges apply, and how to use them efficiently and compliantly.
What Is a Director’s Loan?
A director’s loan is money taken out of a limited company by a director (or close family member) that is not:
- Salary, wages, or benefits
- A dividend
- Reimbursement of expenses
- A repayment of money previously loaned to the company
In short, it’s borrowing company money on a temporary basis — either for personal use or to bridge cash flow gaps.
Every company must maintain a Directors’ Loan Account (DLA) to record amounts:
- Owed to the company by the director (debit/overdrawn)
- Owed by the company to the director (credit/in surplus)
How Are Directors’ Loans Taxed in 2025/26?
1. Corporation Tax S455 Charge (on overdrawn loans)
If a director’s loan is still outstanding more than 9 months after the company’s year-end, the company must pay a Section 455 tax charge to HMRC.
For 2025/26:
- The S455 rate is 33.75%
- It applies to the outstanding balance not repaid within the 9-month window
- The tax is refundable, but only when the loan is fully repaid
Example:
- Company year-end: 31 March 2026
- Loan taken: £20,000 in February 2026
- Still unpaid by 31 December 2026 (9 months after year-end)
Result: S455 tax of £6,750 payable with corporation tax return.
If the loan is repaid later, the company can reclaim this £6,750 — but only 9 months after the end of the accounting period in which the loan was cleared.
This creates a cash flow delay, even if the tax is eventually returned.
2. Personal Tax on ‘Loans Written Off’
If a director’s loan is not repaid and is instead written off, the amount becomes taxable income for the director.
- It is taxed as dividend income
- The company may also need to report it on a P11D
- Employer and employee National Insurance Contributions (NICs) may apply in some cases
Writing off a loan is often more expensive than paying it back, especially once dividend tax and NICs are factored in.
3. Benefit in Kind: Interest-Free Loans Over £10,000
If a director has an interest-free or low-interest loan from the company over £10,000 at any point in the year, it is treated as a benefit in kind (BIK).
For 2025/26:
- The official interest rate used by HMRC is 2.25% (subject to change)
- If no interest is paid, the benefit is calculated as:
Loan balance × official rate × time outstanding - The director pays income tax on the benefit
- The company pays Class 1A NICs (13.8%) on the benefit
You can avoid this by:
- Charging interest at or above the official rate
- Keeping the loan balance below £10,000 at all times during the year
What If the Loan Is Repaid and Re-borrowed?
This is where anti-avoidance rules come in.
If a loan is repaid just before the 9-month deadline and then re-borrowed within 30 days, HMRC may treat it as if it was never repaid. This is known as the “bed and breakfasting” rule.
Example:
- £30,000 loan repaid on 25 December 2026
- £30,000 re-borrowed on 10 January 2027 (within 30 days)
HMRC may still apply the S455 charge, as the repayment is seen as a temporary avoidance.
To prevent this:
- Wait at least 31 days before re-borrowing
- Or make a genuine repayment from personal funds, not by recycling cash through dividends or salaries
There are similar rules where repayments are made from new loans or dividends intended only to offset the loan.
Directors Owed Money by the Company
If the DLA is in credit — i.e., the director has lent money to the company — no tax applies. In fact, the company can choose to pay interest on this loan, which:
- Is deductible for corporation tax (if wholly and exclusively for business)
- Is taxable income for the director
-
May be reported on a Self Assessment return and a CT61 form (if interest is paid gross)
This can be a tax-efficient way to inject funds into a company compared to subscribing for shares or making capital contributions.
Bookkeeping and Compliance Tips
Directors’ loans are common — but can easily cause issues without proper records. To stay compliant:
- Keep clear, up-to-date records of all movements in the DLA
- Ensure formal board minutes or agreements exist for large loans
- Don’t rely on “informal” loans or undocumented transactions
- Reconcile the DLA at the end of each accounting period
Accurate DLA records are essential for preparing correct company accounts, corporation tax returns, and directors’ personal tax returns.
Summary: Key Rules and Planning Points
| Issue | Rule (2025/26) |
|---|---|
| S455 tax | 33.75% if the loan is unpaid 9 months after the year-end |
| Loan write-off | Taxed as a dividend to the director |
| Interest-free loan over £10,000 | BIK applies unless interest is charged at the official rate |
| Repayment and re-borrowing | 30-day anti-avoidance rule may apply |
| Loan to company (credit DLA) | Interest can be paid, deductible for corporation tax |
Final Thoughts
Directors’ loans offer flexibility — but they carry hidden tax risks if not managed carefully. With HMRC continuing to scrutinise small company finances and the 33.75% S455 tax charge creating significant cash flow implications, it pays to plan ahead.
If you’ve borrowed from your company, or are considering it, take time to:
- Understand the rules
- Keep accurate records
- Repay loans well before the 9-month deadline
- Avoid quick repayment/re-drawing cycles
- Review your DLA position at each year-end
