Overdrawn Director’s Loan Account – what does it actually mean?

Sally Charlesworth
Mar 2
2 min read

A director’s loan account becomes overdrawn when you take money out of your company that isn’t salary, dividends, or reimbursed expenses.

It’s very common in owner-managed businesses — but if it’s left unresolved, it can come with unexpected tax bills for both the company and you personally.

What does it mean for the company?

1. Section 455 tax – a temporary corporation tax charge

If the loan hasn’t been repaid within 9 months and 1 day of the company’s year end, the company must pay a special corporation tax charge called Section 455 tax.

Charged at 33.75% of the outstanding loan
It’s temporary, not permanent
But it does hit cashflow

The good news? Once the loan is properly repaid (or cleared via salary/dividends), the company can claim this tax back from HMRC — although the refund usually arrives months later.

2. Benefit in kind if the loan goes over £10,000

If your loan goes over £10,000 at any point in the tax year and you don’t pay interest at HMRC’s official rate:

It creates a benefit in kind
The company must:
- Report it on a P11D
- Pay Class 1A National Insurance at 13.8%

What does it mean for you personally?

1. Personal tax on the benefit in kind

If interest isn’t charged on a loan over £10,000:

You’re taxed personally on the interest benefit
Taxed at your normal income tax rate (20%, 40% or 45%)

2. If the loan is written off

If the company decides to write off the loan:

The amount is treated as income for you
Usually taxed as a dividend (if you’re a shareholder)
This can create a large personal tax bill in one go

3. Quick repayments can be caught

Paying the loan back just before the deadline and then taking the money out again shortly afterwards can trigger HMRC’s anti-avoidance rules — meaning the loan may be treated as if it was never repaid.

Worked Example – £15,000 Overdrawn Loan Account

The situation

Director withdraws £15,000
Loan is still outstanding 9 months after the year end
No interest is charged

Company tax position

Section 455 tax

£15,000 × 33.75% = £5,062.50
Payable by the company to HMRC
Reclaimable once the loan is cleared (but not immediately)

Class 1A NIC on benefit in kind

Approximate interest benefit (at HMRC official rate of 3.75%*)£15,000 × 2.25% = £562.50
Class 1A NIC at 13.8% = £77.63

Official rate shown for illustration — rates can change.

Personal tax position (director)

Benefit in kind tax

Interest benefit: £562.50
If you’re a higher-rate taxpayer (40%):
- Personal tax = £225

If the loan is later written off instead

£15,000 treated as a dividend
Higher-rate dividend tax at 33.75%:
- Personal tax = £5,062.50
The company cannot claim corporation tax relief for the write-off

The big picture

Overdrawn loan accounts are easy to create accidentally
Section 455 tax is a cashflow problem, even if it’s reclaimable
Loans over £10,000 can trigger extra reporting and personal tax
Writing off the loan is often the most expensive option