Overdrawn Director’s Loan Account: 2026/27 Tax Guide

Overdrawn Director’s Loan Account: 2026/27 tax points

A director’s loan account records money a director borrows from or lends to the company. When the account is overdrawn, the director owes money to the company. The tax treatment depends on the balance, how long it remains outstanding, whether the director is also a shareholder, and how the loan is cleared.

Section 455 tax for 2026/27

For a close company loan to a shareholder or participator, section 455 Corporation Tax can arise if the loan remains outstanding after the normal nine-month post year-end period. For loans made on or after 6 April 2026, the section 455 rate is 35.75%. The tax is paid by the company and may later be reclaimable when the loan is repaid, released or written off, subject to the statutory rules and claim timing.

Loans over £10,000 and benefit-in-kind rules

If a shareholder-director owes the company more than £10,000 at any time in the tax year, beneficial-loan rules can apply. For 2026/27 HMRC’s official rate of interest is 3.75%. Where insufficient interest is paid, an income tax benefit and Class 1A National Insurance consequences can arise.

Ways an overdrawn loan can be cleared

• Repayment using the director’s personal funds.

• A properly declared dividend, but only where the company has sufficient distributable profits and the director is entitled to that dividend.

• Salary or bonus credited to the account, taking account of PAYE and National Insurance.

• Amounts genuinely owed by the company to the director may sometimes be credited to the account where the accounting treatment is appropriate.

Using a dividend in 2026/27

The dividend allowance remains £500 for 2026/27. Dividend income above available allowances is taxed at 10.75% at the ordinary rate, 35.75% at the upper rate and 39.35% at the additional rate. Because the director’s other income and available tax bands matter, clearing a loan by dividend is not automatically cheaper than paying section 455 tax.

A dividend must be legally available from distributable reserves and properly documented. It should not be declared simply to remove an overdrawn balance without checking the company’s accounts and the shareholder position.

Repayment and re-borrowing

HMRC has anti-avoidance rules designed to prevent a loan being repaid shortly before the section 455 deadline and then quickly borrowed again. Where significant repayments and new loans occur close together, the detailed matching rules need to be considered.

Practical accounting point

The year-end director’s loan balance should agree to the bookkeeping records and be reflected correctly in the annual accounts and Company Tax Return. An overdrawn balance should therefore be reviewed before the accounts and Corporation Tax return are finalised.

Official guidance: Director’s loans — if you owe your company money

For company accounts and Corporation Tax support in Coventry, see Limited Company Accounting or contact InChart Accounting Limited.