Director's Loan Account Tax Rules 2026/27: The S455 Rate Rise and the 9-Month Deadline

A director's loan account is simply the running record of money that moves between a company and its director outside of salary, dividends, and reimbursed expenses — every time a director takes money out of the company that isn't one of those three things, or puts money in, it goes through the DLA. When a director has taken out more than they've put back in by the company's year end, the account is overdrawn, and that's when two separate, genuinely distinct tax rules start to matter.

The first is Section 455 tax, a temporary charge under the Corporation Tax Act 2010 that applies when an overdrawn loan to a director or other participator in the company remains unpaid nine months and one day after the end of the accounting period in which it arose. The rate rose from 33.75% to 35.75% for loans or additional drawings made on or after 6 April 2026 — a change that directly tracks April's rise in the dividend upper rate, since S455 is deliberately set to discourage directors from using a loan account as an informal, untaxed substitute for a dividend. Anything drawn before 6 April 2026 keeps the older 33.75% rate; only new draws from that date onward attract the higher charge.

That date distinction genuinely matters if a director's loan account has drawings spanning both sides of 6 April 2026, since HMRC applies a default rule — sometimes called the rule in Clayton's Case — that treats the oldest outstanding debt as the first to be repaid when a director makes a partial repayment without specifying otherwise. Left to that default, later, higher-rate drawings tend to be the ones still outstanding at year end, which can mean a larger S455 bill than if the director or company had actively directed which specific drawings a repayment was clearing. Anyone with drawings on both sides of the date line is better off explicitly allocating repayments rather than letting the default rule decide.

It's worth being precise about what actually avoids the charge: repay the loan in full — in cash, genuinely, not through an accounting entry — before the nine-months-and-one-day deadline, and no S455 tax arises at all, regardless of how large the balance was at any point during the year. The charge is entirely about the position at that specific deadline date, not the average or peak balance through the year.

The numbers scale predictably with the size of the overdrawn balance. A £9,500 overdrawn balance generates an S455 charge of £3,206.25 at the old 33.75% rate, or £3,396.25 at the new 35.75% rate. At £25,000, that's £8,437.50 versus £8,937.50. At £50,000, £16,875 versus £17,875. And at £100,000, £33,750 versus £35,750 — a genuine £2,000 difference purely from which side of 6 April 2026 the drawing falls on. It's worth flagging a practical filing wrinkle too: HMRC's own Corporation Tax online service isn't expected to correctly reflect the 35.75% rate until 6 April 2027, so companies with post-6 April 2026 loans filing before then may need to submit at the old rate and later amend the return once HMRC's system catches up.

The second, entirely separate issue is a benefit-in-kind charge, which applies whenever an interest-free or below-market-rate loan exceeds £10,000 at any point during the tax year — a completely different threshold and mechanism from the S455 deadline, and one that can apply even to a loan that's fully repaid well within the nine-month window. HMRC calculates the benefit using its official rate of interest, set at 3.75% for 2026/27: on a £25,000 interest-free loan, that works out to a £937.50 annual benefit, which the director pays personal income tax on, while the company separately pays Class 1A National Insurance, at 13.8%, on that same £937.50 — a further £129.38. At £50,000, the benefit is £1,875 with £258.75 in Class 1A NICs; at £100,000, £3,750 and £517.50. Charging the company interest at or above 3.75% on the loan eliminates this benefit-in-kind charge entirely, an option worth considering for directors planning to run a larger balance for longer.

For a director sitting on an overdrawn balance close to the deadline, there are genuinely different ways to clear it, each with different tax consequences worth weighing rather than defaulting to whichever feels administratively simplest. A straightforward cash repayment before the deadline avoids S455 entirely and carries no further personal tax consequence. Clearing the balance through a dividend avoids S455 too, since the loan is treated as repaid via the dividend, but the dividend itself is taxable income in the director's hands at the standard dividend rates. Voting a salary or bonus to cover the balance also clears the DLA, but runs the full amount through PAYE income tax and both employee and employer National Insurance, typically the most expensive route of the three for a like-for-like amount. A formal write-off or release of the loan is treated differently again: HMRC treats the written-off amount as equivalent to a dividend for income tax purposes, so the director still pays personal dividend tax on it, but the company can't claim a corporation tax deduction for the write-off, and — a detail some directors miss — the arrangement can trigger a company liability for Class 1 National Insurance that isn't itself tax-deductible, making a formal write-off frequently the least efficient of the available options rather than a convenient shortcut.

One anti-avoidance trap worth knowing about specifically: repaying a loan shortly before the deadline and then redrawing a similar amount shortly afterward doesn't necessarily avoid S455. HMRC's "bed and breakfasting" rules disregard a repayment for S455 purposes if a new loan of £5,000 or more is taken out within 30 days of the repayment, and a separate rule can catch larger arrangements — broadly, repayments over £15,000 made outside that 30-day window can still be matched against a later redraw if there's evidence an intention to re-borrow existed at the time of repayment. Both rules exist specifically to stop a repayment made purely to dodge the year-end S455 test from actually working, so a repayment intended to be genuine and lasting is the only kind that reliably avoids the charge.

If S455 tax has already been paid and the loan is later repaid, released, or written off, the company can reclaim it using form L2P — but not immediately. The refund becomes payable nine months and one day after the end of the accounting period in which the loan was actually cleared, not the period the original charge related to, and claims must be made within four years of the period in which the loan was settled. For a company that pays S455 tax and then repays the loan two years later, that can mean two full years of cash tied up with HMRC before the refund arrives — worth factoring into cash flow planning rather than assuming a quick turnaround once the loan itself is cleared.