Director Loan Account Pitfalls, the S455 Tax Trap That Catches Thousands of Directors Every Year

HMRC is reviewing thousands of director loan accounts. If you have been using your company account informally, this article explains the S455 tax charge and how to avoid it.

What Is a Director Loan Account?

HMRC is currently reviewing thousands of director loan accounts across the UK following a compliance campaign in 2025. If you have been using your company account informally, this article is worth reading carefully.

A director loan account records money taken from the company that is not salary, dividends, or reimbursed expenses. If you transfer company money to your personal account to cover a personal cost, it goes on the director loan account as a loan from the company to you.

The S455 Tax Charge

If the loan account is overdrawn at your company year end and not repaid within nine months and one day, the company pays S455 tax at 33.75 per cent of the outstanding balance.

On a £30,000 overdrawn loan, that is £10,125 paid to HMRC. The tax is refundable once the loan is repaid, but the refund can take years to process. In the meantime, the company is out of pocket.

The Bed and Breakfasting Trap

If you repay the loan before the deadline and then borrow again within 30 days, HMRC treats it as if the repayment never happened. The S455 charge still applies. This is the most common mistake directors make.

The repayment must be genuine and permanent. Circular transactions designed to game the deadline are specifically targeted by HMRC's anti-avoidance rules.

Loans Over £10,000

If the loan balance exceeds £10,000 at any point in the tax year and you are not charging yourself interest at HMRC's official rate (3.75 per cent for 2025 to 2026), the difference is treated as a benefit in kind.

The company pays Class 1A National Insurance on it. You pay income tax on it. The cost adds up quickly and is entirely avoidable with proper planning.

What Happened in HMRC's 2025 Campaign

HMRC contacted around 4,000 companies in 2025 where anticipated loan repayments had been entered on CT600A returns but never actually took place. Relief was being claimed on repayments that did not happen.

The campaign is ongoing. Companies with large or growing director loan balances should expect increased scrutiny in their next corporation tax return.

How to Avoid the Problem

Keep the loan account in credit if possible. If it is overdrawn, repay before the nine-month deadline with genuine funds, not circular transactions.

Declare a dividend to cover the balance if the company has sufficient retained profits. Do this properly with board minutes and dividend vouchers. Talk to your accountant early if the balance is growing.

What This Has to Do with Finance

An overdrawn director loan account shows up on company accounts. Lenders see it. A large overdrawn DLA can raise questions during a business loan application about how the company is being managed.

Keeping it tidy is good for both tax compliance and creditworthiness. If tax liabilities are affecting your business cash flow, we can help spread the cost.

If tax liabilities are affecting your business cash flow, talk to us about spreading the cost.