Running a limited company and wondering what a director’s loan actually is? This is one of the most misunderstood topics among UK company directors. Many directors fall into one without realising the tax consequences. This guide covers everything you need to know about a director’s loan in a limited company. We explain the limits, repayment deadlines and S455 tax. We also cover lesser-known rules, such as bed and breakfasting, which catch out even experienced directors. All figures in this guide reflect the current rules for the 2026/27 tax year. We checked them directly against GOV.UK and the Companies Act 2006, so you can rely on them. This topic matters to anyone running a limited company in the UK, whatever its size. A solid grasp of director’s loan rules protects both your money and your company. Let’s start with the basics, then move on to the more advanced pitfalls.
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What is a director’s loan in a limited company?
A director’s loan is money a director takes from the company outside salary, dividends and expense repayments. HMRC records these transactions in what’s called a Director’s Loan Account, or DLA.
The DLA works like a running account between you and the company. If you put money into the business, the account shows a balance in your favour. If you take out more than you put in, the account goes overdrawn.
In practice, a director’s loan often happens by accident. You might pay for a personal purchase on the company card, or the company could cover a personal bill. Sometimes you simply draw an advance before the year-end. Each of these transactions lands on the DLA.
It helps to separate two situations. A formal director’s loan is a deliberate decision, often backed by a written agreement. On the other hand, an accidental overdrawn balance is simply the result of everyday transactions. These build up without anyone noticing.
Typical transactions on the DLA include personal purchases paid on the company card, or cash taken from the till. Equally common is the company covering a personal bill by mistake. If you pay money into the company yourself, for example to fund start-up costs, the balance works the other way. The company then owes you instead.
The definition also covers people connected to the director, such as a spouse or close family member. HMRC calls the director a “participator” in this context. This matters, because the same rules apply to loans made to those connected people too.
Regardless of how it happened, your limited company must track the DLA balance throughout the tax year. Your accountant includes it in the annual accounts.
How much can you borrow from your limited company without shareholder approval?
Under the Companies Act 2006, a limited company can lend a director money without formal shareholder approval up to £10,000. Above that threshold, you need an ordinary resolution from shareholders.
Before the vote, you must prepare a written memorandum describing the loan. It needs to cover the amount, the purpose and the repayment terms. Without this document, the resolution is invalid.
For credit transactions, such as purchases on a company card, the threshold is higher at £15,000. Above this amount, shareholder approval is required too. For expenses connected to your duties as director, the threshold rises to £50,000.
If your limited company has a single director who is also the sole shareholder, approval is technically still required. In practice, this simply means signing one resolution yourself. Our guide to UK LTD company accounting essentials offers a wider refresher on company structure. It covers shareholder duties too.
Every loan above £10,000 must therefore appear in the company’s annual accounts. This follows section 413 of the Companies Act 2006. This information becomes public through Companies House. Skipping this requirement can leave the director personally liable.
A loan made without the required approval isn’t automatically illegal, but it becomes “voidable”, meaning it can be cancelled. Both the company and the director could face consequences as a result.
It’s also worth remembering that these thresholds apply to the total of all loans connected to one director. They don’t apply to each transaction separately. If you already have £7,000 outstanding and draw another £5,000, the combined £12,000 crosses the threshold and needs shareholder approval.
How long do you have to repay a director’s loan?
You have exactly 9 months and 1 day from the end of the company’s accounting period. That’s your window to repay a director’s loan. The deadline runs from the year-end date, not from the day you drew the money.
If the company’s accounting period ends on 31 March, for example, you have until 1 January the following year. Missing the deadline by even a single day triggers S455 tax, which we cover in the next section.
Repayment can happen in several ways. You can transfer the money straight back into the company account. Alternatively, you can clear the debt through a dividend or bonus, provided the company has the funds.
Picture a director whose company year-end falls on 31 March 2026. They have until 1 January 2027 to repay any loan drawn during that period. If repayment comes even one day later, the company must pay S455 tax on the full outstanding amount.
This deadline is often confused with the deadline for filing the company’s tax return. That filing deadline falls 12 months after the year-end. These are two separate dates, and mixing them up is a common mistake among newer directors.
The repayment needs to be genuine and lasting. HMRC looks closely at cases where a director repays a loan right before the deadline. It pays even closer attention if they quickly borrow a similar amount again. We cover this trap in the section on bed and breakfasting below.
What is S455 tax on a director’s loan?
A limited company pays S455 tax if a director’s loan isn’t repaid within 9 months and 1 day. From 6 April 2026, the rate stands at 35.75% of the outstanding amount. It was previously 33.75%.
For example, on an unpaid loan of £15,000, the company faces an S455 bill of £5,362.50. Additionally, the tax scales quickly with larger loans: a £30,000 balance creates a bill of £10,725. That’s a significant sum, landing on the company at the worst possible moment.
The good news is that S455 tax is refundable. Once the director repays the loan, the company can reclaim the tax from HMRC. However, the refund only arrives 9 months after the end of the accounting period in which repayment happened.
This means the money can stay frozen for well over a year. During that time, the company loses working capital, which can hit smaller businesses hard.
You can speed up the refund by filing form L2P alongside the company’s tax return. This tells HMRC exactly when and how the loan was repaid.
S455 applies to what’s known as a close company, meaning one controlled by a small group of shareholders. Most one-person limited companies in the UK meet this definition, so the rule touches nearly every small business director.
When does a director’s loan trigger a tax charge on interest?
If the director’s loan balance goes above £10,000 at any point in the tax year, an additional charge applies. This charge relates to interest. HMRC calls this a benefit in kind.
Here’s how it works. If the company charges no interest, or charges below HMRC’s official rate, the difference counts as a taxable benefit. The official rate for 2026/27 is 3.75%.
For example, on an interest-free loan of £15,000, the benefit works out at around £562.50 a year. You pay income tax on that amount at your usual rate, and the company pays Class 1A National Insurance.
Importantly, the £10,000 threshold applies to the balance at any single point in the year, rather than the average balance. Crossing it for just one day is enough to trigger the benefit charge for the period the loan was outstanding. HMRC allows two calculation methods here.
Using the averaging method, the balance at the start and end of the year is used. By contrast, the precise method calculates interest day by day, which can work out better when the balance moves around a lot. The company must report this benefit on a P11D form after the tax year ends.
Reporting must be completed by 6 July following the end of the tax year.
You can avoid this charge in two ways. Firstly, keep the balance below £10,000 throughout the year. Secondly, charge interest at or above HMRC’s official rate.
What is bed and breakfasting, and why does HMRC block it?
Bed and breakfasting means repaying a loan right before the deadline, then quickly borrowing a similar amount again. HMRC treats this as S455 avoidance and has introduced two rules to block it.
The first is the 30-day rule. Imagine you repay at least £5,000 of a loan. If you then borrow at least £5,000 again within 30 days, the repayment gets ignored for tax purposes. HMRC treats the situation as though the repayment never happened.
The second is the arrangements rule, which applies to loans of £15,000 or more. If, at the time of repayment, there was an intention or arrangement to borrow again, the repayment is ignored too. This rule applies regardless of how much time passes between the repayment and the new borrowing.
Take an example. A director owes the company £20,000 as the deadline approaches. They transfer £20,000 back on 1 March, then borrow the same amount again three weeks later, on 22 March. HMRC sees both transactions within the 30-day window and treats the repayment as though it never happened.
At this stage, it’s worth noting one exception to these rules. Repaying the loan can sometimes create an income tax charge for the director. This might happen through a salary or dividend payment, for instance. In that case, the bed and breakfasting rules don’t apply.
Both rules come from section 464ZA of the Corporation Tax Act 2010. HMRC looks at the director’s pattern of behaviour, not just a single transaction. A repeated cycle of repaying and re-borrowing around the 9-month deadline draws particular scrutiny.
The best protection is planning repayment well ahead of time. Ideally, use a genuine source such as a dividend or bonus, rather than another loan.
What happens to a director’s loan when a limited company is liquidated?
If you liquidate a limited company with an outstanding director’s loan, the debt doesn’t disappear. The unpaid balance becomes a company asset, which the liquidator must recover on behalf of creditors.
This applies even if you’re the sole director and you’re the one initiating the liquidation. The liquidator investigates how the debt arose and typically issues a formal demand for repayment.
If you lack the funds to repay, the consequences can be serious. Personal bankruptcy becomes a real possibility. In cases of misconduct, directors can even face disqualification, for anywhere between 2 and 15 years.
The liquidator pays particularly close attention to cases where the loan arose while the company was already insolvent. They also check whether the director knew the business couldn’t meet its debts. Incomplete accounting records make the situation worse still.
A well-known example is Manolete Partners v Karim and others from 2024. That case showed how the courts treat unlawful dividends and the private use of company funds.
If you’re planning to close a limited company with an unpaid director’s loan, speak to an adviser beforehand. Acting early leaves more room for negotiation than waiting for a formal demand from the liquidator.
How do you manage a director’s loan safely in a limited company?
Good practice starts with monitoring the DLA balance regularly. Check it monthly, not just at the annual accounts stage.
If you’re planning a loan above £10,000, prepare a written memorandum first. Then hold a formal shareholder resolution before drawing the money. This protects both you and the company against a claim of an informal transaction.
Consider charging interest at HMRC’s official rate if the balance is approaching £10,000. This is a simpler way to avoid the benefit in kind charge than watching the balance to the pound.
Plan repayment from a genuine source well in advance, ideally a few months before the 9-month and 1-day deadline. Avoid repaying with another loan, as that’s a direct route into bed and breakfasting territory. As an alternative to a loan, you could withdraw part of the profit as a dividend instead. Or speak to our limited company accounting team about the best mix for your situation.
It’s also a good habit to separate personal and business transactions in your bookkeeping. Do this from the moment payment happens, rather than sorting it out at year-end. A dedicated company card and regular expense reports make monitoring the balance far easier.
Keep thorough records of every transaction on the DLA. Should HMRC investigate, or should the company face liquidation, good bookkeeping is your best protection.
What are the most common mistakes directors make?
The first common mistake is treating the business account like a personal wallet. This leads to an overdrawn DLA building up by accident, with no real awareness of the consequences.
The second mistake is ignoring the 9-month and 1-day deadline. Many directors only discover S455 tax when their accountant prepares the annual accounts.
The third mistake is repaying a loan right before the deadline, then quickly borrowing the same amount back. This is the classic bed and breakfasting scenario, and HMRC blocks it effectively.
The fourth mistake is skipping formal shareholder approval for loans above £10,000. Even in a one-person company, the paperwork still needs to exist.
The fifth mistake is having no plan for liquidation with an outstanding loan. Many directors assume the debt simply disappears along with the company, which is a costly misunderstanding.
A sixth, less obvious mistake is mixing director’s loan transactions with business expenses without separate records. This kind of mess makes it much harder for your accountant to get the year-end accounts right.
You can avoid every one of these mistakes through regular conversations with your accountant. Keep an eye on the DLA balance throughout the year too.
Free consultation for limited company directors
Managing a director’s loan properly takes precision and up-to-date knowledge of the rules. A mistake here can cost thousands of pounds in S455 tax or benefit in kind charges.
Our team at LiderTax has helped limited company directors manage their DLA correctly for years. We understand the specific needs of Polish entrepreneurs running businesses in the UK. We work just as closely with any director based here.
Book a free consultation and find out whether your director’s loan is tax-safe. We’ll review your DLA balance and show you how to avoid unnecessary costs.
Get in touch before the repayment deadline starts catching up with you. Planning ahead always costs less than fixing mistakes after the fact.
Frequently asked questions
What is the S455 tax rate on a director’s loan in 2026/27?
The rate is 35.75% of the outstanding loan amount. It applies to loans made from 6 April 2026, while earlier loans are taxed at 33.75%.
How long do I have to repay a director’s loan from my limited company?
You have 9 months and 1 day from the end of the company’s accounting period. After that, the company must pay S455 tax on the unpaid balance.
Do I have to pay interest on a director’s loan?
You don’t have to, but if the balance exceeds £10,000, no interest triggers a benefit in kind charge. HMRC’s official rate for 2026/27 is 3.75%.
What is the bed and breakfasting rule?
It blocks repaying a loan right before the deadline and quickly borrowing the same amount back. HMRC ignores the repayment and charges S455 as though it never happened.
What happens to an unpaid director’s loan if I liquidate my limited company?
The debt doesn’t disappear with liquidation. The liquidator must recover the balance, and the director remains personally liable for it.
