If you run a limited company and you have ever taken money out of the business beyond your salary and dividends, you may have an overdrawn Director’s Loan Account. This is more common than many directors realise. If you do not manage it carefully, it can trigger an unexpected and significant tax charge known as S455 tax.
This article explains what S455 tax is, when it applies, how much it costs, and, most importantly, what you can do to avoid it.
What Is a Director’s Loan Account?
A Director’s Loan Account (DLA) is a running record of all the money that passes between you and your limited company outside of your salary, dividends, and genuine business expenses. Every time you take money from the company for personal use, it is recorded as a debit on your DLA. Every time you put money back in, or the company pays you a salary or dividend, it is recorded as a credit.
If the debits exceed the credits at your company’s year end, your DLA is “overdrawn”, meaning you owe money to your company.
What Is S455 Tax?
S455 tax is a Corporation Tax charge that HMRC applies when a director’s loan account is overdrawn at the company’s year end and the outstanding balance is not repaid within 9 months and 1 day of that year end.
It takes its name from Section 455 of the Corporation Tax Act 2010, and it applies to most small limited companies, which HMRC classifies as “close companies.”
The current S455 tax rate is 35.75% of the outstanding overdrawn balance, following the increase introduced in the Autumn Budget 2025 which took effect from 6 April 2026. This means that if you owe your company £10,000 at the relevant date, your company will face an S455 charge of £3,575 on top of its normal Corporation Tax bill.
When Does S455 Tax Apply?
S455 tax applies when all of the following are true:
•Your company is a close company (most small limited companies qualify)
•Your Director’s Loan Account is overdrawn at your company’s year end
•The overdrawn balance has not been fully repaid within 9 months and 1 day of the year end
The tax is due at the same time as your Corporation Tax payment. 9 months and 1 day after your company’s year end.
Is S455 Tax Permanent?
No, and this is the important distinction. S455 tax is a temporary charge, not a permanent loss. If you repay the overdrawn loan in full, your company can reclaim the S455 tax it has already paid.
However, you cannot reclaim the tax immediately. HMRC will not repay it until 9 months and 1 day after the end of the accounting period in which you repaid the loan. This means there can be a significant cash flow gap between paying the tax and getting it back.
You must also claim the refund within 4 years of repayment.
The Benefit in Kind Trap
S455 tax is not the only risk with an overdrawn DLA. If your loan balance exceeds £10,000 at any point during the tax year, HMRC may also treat it as a benefit in kind. This means:
•You, as the director, may have to pay Income Tax on the benefit through your Self Assessment tax return
•Your company will need to pay Class 1A National Insurance on the benefit
•The loan must be reported on a P11D form
This is an additional cost on top of the S455 charge, so it is well worth keeping your DLA balance below £10,000 wherever possible.
How to Avoid S455 Tax
The good news is that S455 tax is entirely avoidable with good planning. Here are the most practical ways to keep your DLA in order:
Repay the loan before the deadline
If your DLA is overdrawn at your year end, you have 9 months and 1 day to repay it before S455 tax becomes due. This is the simplest and most effective solution.
Vote a dividend
If your company has sufficient distributable profits, you can vote a dividend to offset the overdrawn balance. This effectively converts the loan into a dividend payment. Always make sure your company has the profits to support this before proceeding.
Pay yourself a salary or bonus
Similarly, you can clear the balance by paying yourself a salary or bonus through payroll. Bear in mind that salary and bonuses are subject to Income Tax and National Insurance, so you should weigh up the cost.
Keep your DLA in credit throughout the year
The most straightforward approach is to avoid an overdrawn balance in the first place. Before taking money from the company, check whether you have sufficient salary and dividends voted to cover it.
Keep accurate records. Your accountant can only help you manage your DLA if the records are up to date. Make sure all personal drawings are clearly recorded and reconciled regularly, ideally through your accounting software.
A Note on Making Tax Digital
As HMRC continues to roll out Making Tax Digital, keeping accurate digital records of your Director’s Loan Account will become increasingly important. Good bookkeeping software such as Xero, QuickBooks, or Sage makes it straightforward to track your DLA balance throughout the year and flag any issues well before your year end.
We Can Help
Managing a Director’s Loan Account correctly is one of the areas where having a good accountant makes a real difference. At Penney’s Accountancy, we help our clients in Farnborough and the surrounding areas keep their DLAs in order, plan their salary and dividend strategy, and avoid unexpected tax charges like S455.
If you are unsure about the status of your Director’s Loan Account, please get in touch. We are always happy to help.
Penney’s Finance School
For more practical guidance on the essentials of running a limited company, visit Penney’s Finance School. We offer a range of courses designed to give small business owners the financial knowledge and confidence they need to succeed.
Important Information: The information contained in this article is for general guidance only. It does not constitute financial or tax advice and should not be relied upon as such. Tax rules can change and the impact of any tax planning will depend on your individual circumstances. You should always seek professional advice tailored to your specific situation before taking any action. This information is correct as of July 2026.