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This case study is based on genuine client work carried out by our practice. Names, figures and identifying details have been changed to protect confidentiality, and the numbers shown are representative of the situation rather than the exact amounts. Your own position will differ.
The scenario
A director has been taking money out of the company as and when they need it. A few hundred here, a few thousand there, paying personal costs from the company card. Nobody called it anything. At the year end, the accountant points out the director owes the company £20,000.
The director is baffled. It is their company. How can they owe it money?
The company is not you
This is the single most important thing to understand about running a limited company, and the point at which a lot of people learn it the hard way.
The company is a separate legal person. Its money is not your money. When you take money out that is not salary, not a dividend, and not a legitimate expense reimbursement, you have borrowed it. That is a director loan, and it goes on a director loan account.
There is nothing wrong with it. It only becomes expensive if it is still outstanding at the wrong moment.
What it actually costs
Section 455 tax. If the loan is still outstanding nine months and one day after your company year end, the company pays a charge of 35.75% of the balance. This rate applies to loans made on or after 6 April 2026. For loans made between 6 April 2022 and 5 April 2026 the rate is 33.75%. On £20,000 that is £7,150.
The good news is it is refundable. The company gets it back once the loan is repaid. The bad news is the timing: you generally wait until nine months after the end of the accounting period in which repayment happened. So the company is out of pocket by £7,150 for a long time, and refunds are notoriously slow.
Benefit in kind. If the loan goes over £10,000 at any point in the year and you are not paying HMRC official rate interest on it, there is a taxable benefit on you personally, reportable on a P11D, with Class 1A National Insurance for the company.
Bed and breakfasting rules. Repaying just before the deadline and taking it straight back out afterwards does not work. There are specific anti avoidance rules for exactly that.
The ways out
Repay it before the nine month deadline. Simplest, if you have the cash.
Declare a dividend to clear it, if the company has distributable profits. You pay dividend tax at 10.75% or 35.75%, which is generally better than a £7,150 charge tied up for years. But the profits must genuinely be there. A dividend from a company without distributable reserves is unlawful.
Vote a bonus. Deductible for the company, but it carries National Insurance, so it is often the most expensive route.
Write it off and it is taxed on you as if it were a dividend, with National Insurance consequences too. Rarely the best option.
The point of this example
The problem here is not the loan, it is not knowing there was one. Money drifting out of a company account without being classified is how a director ends up owing £20,000 they did not know about, nine months from a charge they have never heard of.
Keep company money and personal money separate, and if you must take money out, decide what it is at the time. If you think you may have an overdrawn loan account, get in touch well before the nine month point, because after it the options narrow.
Loan account creeping overdrawn?
We track your loan account, plan repayments before deadlines, and set up an efficient way to pay yourself, so the s455 and benefit in kind charges never bite.