HMRC Clamps Down on Directors' Loan Accounts

Posted: July 8, 2026

Many shareholders of owner-managed companies use directors’ loan accounts (DLAs) to withdraw money from their companies. When managed correctly, they are a perfectly legitimate and flexible way of taking funds from a business.

However, HMRC has made it clear that it is paying closer attention to directors’ loan accounts, particularly where loans remain outstanding for long periods or are repeatedly repaid and redrawn.

If you are a company director, now is a good time to review your position — ideally as part of a wider review with our corporation tax services team.

What is a Director’s Loan Account?

A director’s loan account records money owed between a company and its directors.

The balance may arise because:

you have introduced personal funds into the company;
the company has reimbursed your expenses;
you have withdrawn more money than your salary and dividends cover; or
the company has lent you money.

If the account becomes overdrawn, you effectively owe money back to your company.

Why is HMRC Increasing its Focus?

HMRC has identified directors’ loan accounts as an area where tax can be avoided or delayed.

Common issues include:

loans remaining unpaid for several years;
using loans instead of taxable remuneration;
repeatedly repaying loans shortly before the tax deadline and borrowing the money back again (known as “bed and breakfasting”);
poor bookkeeping resulting in incorrect balances; and
unlawful dividends being credited to clear loan accounts where there were insufficient distributable profits.

As digital reporting and HMRC’s data analysis become more sophisticated, inconsistencies are becoming much easier to identify during enquiries.

The Tax Consequences

Corporation Tax Charge

If a loan to a participator (which includes most shareholder-directors of close companies) remains outstanding more than nine months and one day after the company’s accounting period ends, the company may have to pay a temporary corporation tax charge under section 455 of the Corporation Tax Act 2010.

The tax is currently charged at 33.75% of the outstanding loan balance.

The good news is that this is generally recoverable once the loan has been repaid or otherwise cleared, but the repayment may not be received until several months later, creating a significant cash-flow cost.

Benefit-in-Kind Tax

If the loan exceeds £10,000 at any time during the tax year and interest is not charged at HMRC’s official rate (or no interest is charged), the director may be taxed on a beneficial loan, with the company also becoming liable to Class 1A National Insurance contributions.

Anti-Avoidance Rules

HMRC has strong anti-avoidance legislation aimed at preventing directors from avoiding the section 455 charge by temporarily repaying loans shortly before the nine-month deadline and then withdrawing the money again shortly afterwards.

Where these rules apply, HMRC can ignore the repayment and continue to treat the original loan as outstanding.

Record Keeping Matters

One of the most common problems we encounter is inaccurate bookkeeping.

Directors should ensure that:

loan account balances are regularly reconciled;
dividends are only declared where sufficient distributable profits exist;
personal expenditure paid by the company is correctly recorded;
salary, dividends and expense claims are properly distinguished; and
any loans are supported by appropriate documentation.

Poor records can result in unexpected tax liabilities and make HMRC enquiries significantly more difficult to resolve.

Practical Steps

If your director’s loan account is overdrawn, consider:

reviewing whether repayment before the section 455 deadline is possible;
declaring lawful dividends where sufficient distributable reserves exist;
considering additional salary or bonus payments where appropriate;
ensuring any repayments are genuine and not caught by the anti-avoidance rules; and
reviewing the account before your company year-end rather than after it.

Taking action early usually provides many more planning opportunities than waiting until the company accounts are prepared.

How RJP LLP Can Help

Directors’ loan accounts are a routine feature of many owner-managed companies, but the tax rules surrounding them are increasingly complex and HMRC scrutiny is continuing to increase.

At RJP LLP, we can:

review your director’s loan account;
identify any section 455 tax exposure;
advise on the most tax-efficient way to clear outstanding balances;
ensure dividends have been correctly declared; and
help minimise the risk of HMRC enquiries and unexpected tax charges.

If you would like us to review your company’s director’s loan account before your next year end or corporation tax filing, please contact your usual RJP LLP adviser.