If you are a company director and have ever transferred money from your business account into your personal account “just temporarily”, you may have unknowingly created what’s called a Director’s Loan. And if that loan is not repaid in time, your company could face an additional HMRC tax charge known as Section 455 Tax.

The reality is that many business owners accidentally fall into this trap simply because nobody has properly explained the rules to them.

Section 455 tax is a temporary tax charge that applies when a director borrows money from their limited company and does not repay it within a certain timeframe.

Think of it like this:

HMRC does not want directors using company bank accounts as personal overdrafts.

If money is taken from the company and it is not:

• salary,
• dividends,
• reimbursed expenses, or
• repaid quickly enough,

Then HMRC treats it as a director’s loan. If that loan remains outstanding 9 months after the company year end, the company must pay additional tax. The current Section 455 tax rate is 35.75% of the outstanding loan balance.

What Is a Director’s Loan Account?

A Director’s Loan Account (DLA) keeps track of money:

• you put into the company, and
• you take out of the company.

If the company owes you money, that is generally fine. However, if you owe the company money, the account becomes overdrawn — and this is where Section 455 tax can apply.

Many directors accidentally create overdrawn loan accounts by:

• transferring money to themselves casually,
• paying personal bills from the business account,
• taking money instead of payroll or dividends,
• or not keeping proper bookkeeping records.

This is incredibly common in owner-managed businesses.

The 9-Month Rule

This is the key deadline most business owners need to understand.

If the director’s loan is still outstanding: 9 months and 1 day after the company year end, then the company must pay Section 455 tax.

For example:

• Company year end: 31 March 2026
• Section 455 deadline: 1 January 2027

If the loan remains unpaid at that point, the tax charge applies.

Worked Example

Let’s make this practical. Imagine you take £20,000 from your company during the year for personal spending. The money was not processed as salary or dividends.

At the year end, the £20,000 is still owed back to the company. Nine months later, the loan still has not been repaid, the company would then face a Section 455 tax charge of:

£20,000 × 35.75% = £7,150

That means the company must pay HMRC an additional £7,150.

Now here is the important part: This tax is usually temporary, once the loan is repaid, the company can normally reclaim the Section 455 tax from HMRC. However, there can often be a significant delay before the refund is received.

Why This Causes Problems for Business Owners

The issue is not always the tax itself. The real problem is usually cash flow.

Many business owners:

• do not realise they have created an overdrawn loan account,
• do not budget for the tax,
• and then face a surprise HMRC bill.

This often happens alongside:

• Corporation Tax,
• VAT liabilities,
• personal tax bills,
• payroll obligations,
• and day-to-day business costs.

Suddenly, cash flow becomes extremely tight, this is why proactive bookkeeping and tax planning matter.

Common Mistakes Directors Make

1. Treating the Company Account Like Personal Money

A limited company is a separate legal entity.

The business bank account is not simply “your money”.

Money withdrawn incorrectly can trigger both tax issues and bookkeeping complications.

2. Forgetting About Dividends

Some directors assume they can simply transfer money out whenever they want.

However, dividends must be properly declared and supported by available profits.

If they are not, withdrawals can end up sitting in the loan account instead.

3. Poor Bookkeeping

If bookkeeping is months behind, directors often have no idea what their loan balance actually is.

By the time year-end accounts are completed, the problem has already snowballed.

4. Repaying the Loan Too Late

Once the 9-month deadline passes, the tax charge is triggered.

Timing matters.

Can You Avoid Section 455 Tax?

Yes — in many cases. Good planning makes a huge difference.

Possible solutions may include:

• repaying the loan before the deadline,
• processing salary correctly,
• declaring dividends properly,
• improving bookkeeping accuracy,
• forecasting cash flow earlier,
• and monitoring director loan balances throughout the year.

This is where having proactive accountants and advisers becomes invaluable.

Is Section 455 Tax Permanent?

Usually no. The company can generally reclaim the tax after the director’s loan has been repaid.

However:

• the reclaim process takes time,
• cash flow may still suffer in the meantime,
• and HMRC will not refund it immediately.

So whilst it is technically temporary, it can still create major pressure on a business.

The Key Message

Your company is not your personal bank account.

If you take money from the company without properly declaring it as salary or dividends, and do not repay it in time, HMRC applies a temporary tax charge through Section 455. The good news is that with proper bookkeeping, proactive advice, and regular financial reviews, these issues are usually avoidable.

Need Help Understanding Your Director’s Loan?

At Arcus Accountants & Business Advisers, we help business owners understand their numbers in plain English.

We work proactively with our clients to:

• monitor director loan accounts,
• improve cash flow visibility,
• plan for tax liabilities,
• and avoid nasty surprises from HMRC.

If you are unsure whether your Director’s Loan Account is overdrawn — or want clarity around your tax position — get in touch.