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    TaxKilnUK tax guidance
    TaxKilnUK tax guidance

    Director's Loan Account + s.455 Charge

    A **Director's Loan Account (DLA)** is the running balance of money the company owes the director OR the director owes the company. Where the director OWES the company (overdrawn DLA), three tax consequences may follow: (1) **s.455 CHARGE**: if the overdrawn balance is still outstanding 9 MONTHS + 1 DAY after the company's accounting period end, the company pays 33.75% Corporation Tax on the outstanding amount (matching the upper-rate dividend tax). The s.455 charge is REFUNDED when the loan is repaid (mechanism via CT600A reclaim, takes ~9 months after repayment). (2) **BIK on loan interest**: if the director doesn't pay interest at HMRC's Official Rate (2.25% from 6 April 2025) on loans above £10,000 at any point in the tax year, the difference is taxable as employment benefit + employer Class 1A NIC. (3) **30-day 'bed and breakfasting' anti-avoidance**: repaying just before year-end + re-borrowing immediately after doesn't escape s.455 if the pattern is engineered to avoid the charge. **Write-off**: where the company forgives the director's loan, the written-off amount is treated as DIVIDEND for the director (income tax at dividend rates) + the company gets no CT deduction.

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    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

    What this relief is, in plain English

    Director's Loan Accounts are the running balance between director + company, recording every transaction where money flows between the two. Goes positive when the company owes the director (e.g. director paid expenses personally, expense claim approved); goes negative when the director owes the company (e.g. director took cash from the company without it being properly accounted as salary or dividend). The TAX PROBLEM with overdrawn DLAs is the **s.455 charge** + the **BIK on loan interest**. **s.455 mechanics**: Corporation Tax Act 2010 imposes a 33.75% Corporation Tax charge on overdrawn DLA balances outstanding 9 months + 1 day after company year-end. The rate matches the upper-rate dividend tax, deliberately designed to remove the cash-flow advantage of taking money via loan instead of dividend. The charge is REFUNDABLE when the loan is repaid (via CT600A reclaim) but the cash flow timing matters: pay the s.455 first, get the refund later (~9 months after the period in which repayment occurs). **BIK on loan interest**: if loan balance exceeds £10,000 at any point in the tax year + the director pays less than HMRC's Official Rate of Interest (2.25% from 6 April 2025) to the company, the difference is taxable employment benefit + employer Class 1A NIC. The £10,000 de minimis is the most common avoidance route, many directors structure DLA usage to stay under £10,000. **Anti-avoidance (30-day bed-and-breakfasting)**: CTA 2010 s.464A blocks the obvious work-around of repaying before year-end + re-borrowing immediately after. HMRC treats such patterns as continuing loan for s.455 purposes. **Write-off mechanics**: forgiving a director's loan is treated as DIVIDEND for the director (dividend tax) + company gets no CT deduction. Generally expensive, plan to repay rather than write off. **Practical owner-director planning**: most owner-managed Ltd Co directors operate small DLA fluctuations (~£5,000-£10,000 range) to handle timing gaps between expense outflows + salary/dividend inflows. Below £10,000: no BIK. Repay within 9-months-plus-1-day of year-end: no s.455. This 'discipline window' is what keeps DLA mechanics simple. Crossing it triggers cash-flow and tax-cost consequences that require active management.

    How it works

    DLA mechanics, running balance

    DLA records every monetary transaction between director + company. Positive balance = company owes director (e.g. unreimbursed expenses, salary owed but not paid). Negative balance = director owes company (e.g. director drew cash, personal expenses paid by company). Best practice: review DLA monthly; settle small balances regularly; avoid letting the balance drift into significant overdrawn territory.

    s.455 charge, 33.75% CT on overdrawn balance

    If DLA still overdrawn 9 MONTHS + 1 DAY after company year-end, Corporation Tax charge at 33.75% applies to the outstanding balance. Charge matches upper-rate dividend tax (since April 2022), designed to remove cash-flow advantage of loan vs dividend. Charge is REFUNDABLE when the loan is eventually repaid, via CT600A reclaim, ~9 months after the period of repayment. Cash-flow impact: pay now, recover later.

    BIK on loan interest, ORI 2.25% (April 2025+) + £10k threshold

    Loans above £10,000 at any point in tax year + interest below ORI (2.25% from 6 April 2025) → difference taxable as BIK to director + employer Class 1A NIC. £10,000 de minimis is the most common avoidance route. Charge ORI-equivalent interest from director to company to avoid BIK, interest received is taxable to company as savings income.

    Anti-avoidance + write-off mechanics

    **30-day bed-and-breakfasting rule (s.464A)**: repaying before year-end + re-borrowing within 30 days in £5,000+ amounts doesn't reset s.455 clock, HMRC treats as continuing loan. **Write-off**: forgiving a director's loan is dividend treatment for director (income tax) + no CT deduction for company. Generally expensive, plan to repay rather than write off.

    Who qualifies

    Interactions with other reliefs

    Dividend extraction

    DLA + dividend extraction are alternative cash-flow mechanisms. Dividend has immediate tax cost (8.75% / 33.75% / 39.35%); DLA has potential s.455 cost (33.75%) if not repaid within window. Many directors use DLA for short-term cash needs (no immediate tax) + structure repayment via subsequent dividend declaration.

    Salary + Employment Allowance

    DLA + salary are alternatives. Salary triggers immediate PAYE income tax + NI but generates Employment Allowance / pension capacity. DLA gives temporary cash without immediate tax but creates s.455 + BIK risk. Balance depends on cash flow horizon + planned extraction route.

    Corporation Tax Marginal Relief

    s.455 charge is Corporation Tax, applies on top of normal CT computation. For Ltd Co in the £50k-£250k marginal band, the s.455 charge applies independently of marginal relief on trading profits. Calculation: trading profits get marginal relief; s.455 charge on overdrawn DLA is a separate 33.75% charge added to CT bill.

    Workplace Pension Employer Contributions

    Where directors face cash flow gaps + would otherwise increase DLA, redirecting to pension contributions can solve the gap. Company makes employer pension contribution → CT-deductible + zero NI + zero BIK to director + zero s.455 risk. For directors who don't need cash immediately, pension extraction beats DLA growth substantially.

    Common mistakes + audit triggers

    Worked example

    Lucas, Bristol - Sole director of Ltd Co with cash flow gap covered by DLA overdraw (2025/26)

    Lucas's Ltd Co year-end 31 March 2025. He needed personal cash for a house deposit in February 2025 + took £40,000 from the company via DLA (not dividend or salary). At 31 March 2025: DLA overdrawn £35,000 (he'd repaid £5,000 by then). Company's s.455 deadline: 1 January 2026.

    Calculation: **Scenario A: Lucas can't repay before 1 January 2026.** - £35,000 outstanding at deadline → s.455 charge 33.75% × £35,000 = **£11,813 Corporation Tax** - Company pays £11,813 to HMRC alongside normal CT for 31 March 2025 period - If/when Lucas eventually repays the £35,000 (e.g. in 2026/27): company claims s.455 refund via CT600A → £11,813 refunded ~9 months after repayment period CT submission - **Net economic cost**: financing cost of having £11,813 with HMRC for ~24-30 months + admin cost of CT600A reclaim **Scenario B: Lucas declares dividend before 1 January 2026 to clear DLA.** - £35,000 dividend declared → DLA cleared - Dividend tax at higher rate 33.75%: 33.75% × £35,000 = £11,813 income tax payable by Lucas - **Same effective tax cost** but Lucas's personal cash flow now affected (income tax payable Jan 2027 via SA) - No s.455 charge; no refund admin **Scenario C: Lucas charges interest on DLA + manages under £10k BIK threshold.** - Repays down to £9,500 within tax year + pays ORI-equivalent interest going forward - £9,500 balance is below s.455 trigger if cleared by 1 January 2026 (still subject to s.455 if not, s.455 has NO threshold) - BIK avoided because balance under £10,000 - Need to repay all £9,500 by deadline OR accept partial s.455 on outstanding amount **Strategic conclusion:** DLA overdraw above £10,000 is genuine planning territory, interaction between cash flow needs + s.455 timing + BIK threshold + dividend tax cost creates real choices. Most owner-directors use small DLA fluctuations (~£5,000-£8,000 range) under the £10k threshold + cleared monthly. Larger amounts need active management: either accept the s.455 cost (refundable but timing-impacted) or convert to dividend (immediate tax but clean). **Documentation**: maintain detailed DLA records, date + amount of each transaction; explanation; running balance. Annual review at year-end. Plan repayments before 9-months-plus-1-day deadline. Consider whether dividend declaration is the cleaner mechanism for repaying overdrawn DLAs at year-end.

    Statute reference: Corporation Tax Act 2010 + Income Tax (Earnings and Pensions) Act 2003 CTA 2010 s.455 (charge) + s.464A (anti-avoidance) + ITEPA 2003 s.175 (BIK on loans). HMRC manual: CTM61500 onwards + EIM26100 onwards.

    Frequently asked questions

    What happens if I miss the Self Assessment deadline?+
    The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.
    Do I need an accountant or can I file Self Assessment myself?+
    Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.
    How do payments on account work?+
    When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.
    My company year-end is 31 March + I have a £30,000 overdrawn DLA at that date, when does s.455 trigger?+
    **9 months + 1 day after year-end = 1 January following.** For 31 March 2025 year-end: s.455 triggers if balance still overdrawn at 1 January 2026 (the corporation tax payment date for the period). If you repay £30,000 between 31 March 2025 and 1 January 2026, NO s.455 charge. If you repay £20,000 + leave £10,000 outstanding at 1 January 2026: s.455 charge applies to the £10,000 = 33.75% × £10,000 = £3,375 CT. The s.455 charge is refunded later when the £10,000 is eventually repaid, claim via CT600A, ~9 months processing time after the next CT period when the loan was repaid. **NOTE**: The £10,000 'small loans' exemption referred to elsewhere is the BIK threshold, NOT a s.455 threshold. s.455 applies to ANY overdrawn DLA balance outstanding past the 9-months-plus-1-day window, regardless of size.
    What's the BIK on a director's loan + how does the £10,000 threshold work?+
    If the director has BORROWED MORE THAN £10,000 from the company AT ANY POINT in the tax year + the loan attracts interest BELOW HMRC's Official Rate of Interest (2.25% from 6 April 2025), the DIFFERENCE between actual interest paid + the ORI-equivalent interest is a TAXABLE BENEFIT-IN-KIND. **Example**: £20,000 loan outstanding for full tax year, no interest paid. BIK = 2.25% × £20,000 = £450/year. Director pays income tax on £450 at marginal rate (40% higher = £180). Company pays Class 1A NIC at 15% on £450 = £67.50. To AVOID the BIK: charge ORI-equivalent interest from director to company (interest received is taxable to company as savings income, BUT no BIK + no NIC). **£10,000 de minimis**: if the loan balance NEVER EXCEEDS £10,000 at any point in the tax year, no BIK arises regardless of whether interest is charged. Many directors structure DLA usage to stay under £10,000 + avoid the BIK mechanic entirely.
    Can I repay my DLA on 30 March + re-borrow on 6 April to reset the s.455 clock?+
    No, this is the classic 'bed and breakfasting' anti-avoidance scenario. CTA 2010 s.464A applies: if a director repays a DLA + then receives a new loan from the company WITHIN 30 DAYS of the repayment, in amounts of at least £5,000, HMRC treats the repayment as NOT having reduced the s.455 charge. The new loan is treated as a continuation of the original. **EXCEPTION**: where the company makes a genuine commercial decision to recall + re-grant the loan (e.g. restructuring DLA after change in director role), the rule may not apply, but the burden of proving genuine commercial reason falls on the company. Most engineered bed-and-breakfasting attempts fail HMRC scrutiny. **Practical advice**: if you need to access cash that would create an overdrawn DLA, consider: (a) declaring dividend instead (immediate tax cost but no s.455 risk); (b) repaying within the 9-month window after year-end; (c) accepting the s.455 charge as a short-term cost (refundable when eventually repaid).
    My company is writing off my £25,000 DLA, what's the tax position?+
    **Director side**: written-off amount treated as DIVIDEND for income tax purposes. £25,000 dividend at higher rate 33.75% = £8,438 dividend tax to the director. Higher-rate / additional-rate position depending on other income. The dividend allowance (£500) applies. **Company side**: the company gets NO Corporation Tax deduction on the write-off (CTA 2009 specifically denies relief for loans written off to participators in a close company). **NIC**: no Class 1 NIC (it's dividend treatment, not employment income). However, if HMRC argues the write-off is part of remuneration (rare but possible), Class 1A NIC could apply on the value as a benefit. **Strategic implications**: DLA write-offs are expensive, director pays dividend tax without the company getting CT relief that a dividend declaration would have given. Generally only used where (a) the company is being wound up + the loan can't realistically be collected, OR (b) the director has died + the executor cannot repay. Plan to repay rather than write off where commercially possible.

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