Directors’ loan accounts and Section 455: What you need to know before borrowing from your business

Directors’ loan accounts (DLAs) can be a flexible way to manage cash flow, especially in small businesses where personal and company finances often overlap. But if not handled properly, they can trigger unexpected tax charges under Section 455 of the Corporation Tax Act 2010. Here’s what you need to know to stay compliant and avoid costly surprises.

1. What is a Directors’ loan account (DLA)?

A DLA records any money a director borrows from or lends to their company that isn’t salary, dividends, or reimbursed expenses. It’s a running balance and if it’s overdrawn at year-end, it can create tax issues for both the company and the director.

2. Section 455: The nine-month rule

If a director (or an associate) owes money to the company and doesn’t repay it within nine months and one day after the end of the accounting period, the company must pay a tax charge under Section 455, currently 33.75% of the outstanding loan.

This charge is paid by the company, not the individual, and it’s designed to discourage long-term borrowing without proper tax treatment.

3. Anti-avoidance rules: No “bed and breakfasting”

HMRC has strict rules to prevent directors from repaying loans temporarily just to avoid tax. These include:

• The 30-day rule: Repayments of £5,000+ made within 30 days of taking out a new loan are ignored.

• The arrangements rule: If a new loan of £5,000+ is planned while the old loan exceeds £15,000, repayments are also disregarded.

These rules target “bed and breakfasting” where loans are repaid and reissued to dodge Section 455.

4. Exceptions to Section 455

Not all loans trigger the charge. Exceptions include:

• Loans made in the ordinary course of business (e.g. trade credit).

• Loans under £15,000 to employees without a material interest in the company.

• Goods or services supplied on normal credit terms (with repayment within six months).

If you’re unsure whether your loan qualifies, it’s best to get advice early.

5. Relief for Section 455 tax

If the loan is eventually repaid, the company can reclaim the Section 455 tax - but only nine months and one day after the end of the accounting period in which the repayment occurred. Claims are made via Form L2P, and proper documentation is essential.

6. Benefit in Kind and personal tax

If a director borrows more than £10,000 without paying interest at HMRC’s official rate, it’s treated as a Benefit in Kind. That means:

• The director pays personal tax on the benefit.

• The company pays Class 1A National Insurance.

• The loan must be reported on Form P11D.

Charging interest at the official rate can avoid this, but make sure it’s documented and reported correctly.

At BlueFox Accounting, we help directors manage their loan accounts with clarity and compliance. Whether you’re borrowing for short-term needs or planning a long-term strategy, we’ll guide you through the rules and help you avoid hidden tax traps.