If you take money from your limited company that isn't a salary, dividend, or legitimate expense repayment, that amount sits in your director's loan account (DLA). If that account is overdrawn at your company's year end, HMRC can charge you 33.75% tax under Section 455 (S455) of the Corporation Tax Act 2010. That is a charge on the company, not on you personally. And it is repayable only when the loan is cleared.

This article explains how to reconcile director loan account year end balances, what records you need, and the practical steps to avoid an unnecessary S455 charge.

What Is a Director's Loan Account?

A director's loan account is simply a record of transactions between you and your company. It tracks money you have put into the company (credits) and money you have taken out (debits). If you take out more than you put in, the account is overdrawn. That overdrawn balance is a loan from the company to you.

Common transactions that create DLA entries include:

  • Personal expenses paid by the company on your behalf (e.g., a personal credit card bill paid from the business account)
  • Cash withdrawals from the company bank account that are not salary or dividends
  • Assets bought by the company but used personally (e.g., a laptop you also use for personal work)
  • Loans from you to the company (these show as a credit balance, meaning the company owes you)

If your DLA is overdrawn at the year end, the company must report it on the Corporation Tax return (CT600) and may have to pay S455 tax.

Why S455 Tax Matters

S455 tax is charged at 33.75% of the overdrawn balance. It is payable 9 months and 1 day after your company's year end. If your company has a 31 March year end, the S455 tax is due by 1 January the following year.

Here is a real example. Suppose you run a 4-employee software consultancy in Manchester turning over £420,000. You took £30,000 from the company in October to cover a personal tax bill. You intended to repay it within the year but forgot. At the 31 March year end, your DLA is overdrawn by £30,000. The company will owe £10,125 in S455 tax (33.75% of £30,000). That is a significant cash flow hit.

The S455 tax is reclaimable once the loan is repaid, but only after the company's next year end. You reclaim it on the CT600 for the year the loan is repaid. So the cash is locked up with HMRC for at least 12 months.

How to Reconcile Your Director's Loan Account Before Year End

Reconciling your DLA before the year end is a straightforward process if you keep good records. Here is the step-by-step approach we use with our clients at Holloway Davies.

Step 1: Pull All Transactions Between You and the Company

Export all transactions from your company bank account that involve you personally. This includes payments to you, payments from your personal account to the company, and any payments the company made to third parties on your behalf (like a personal credit card bill).

Most accounting software like Xero, FreeAgent, or QuickBooks has a director's loan account report. Run that report for the full financial year. If you are using FreeAgent, go to "Accounts" then "Director's Loan Account". In Xero, go to "Reports" then "Director's Loan Account".

Step 2: Categorise Every Transaction

Go through each transaction and assign it to the correct category:

  • Salary: Already processed through payroll. Should not appear in the DLA if processed correctly.
  • Dividends: Must be supported by a dividend voucher and board minutes. If you took dividends but did not document them, they may be reclassified as a loan.
  • Expense reimbursements: Legitimate business expenses paid personally and then reimbursed by the company. These should be in the DLA as credits (company owes you).
  • Personal drawings: Money taken for personal use. These are the problem items.
  • Loans to the company: Money you put in. These are credits.

If you find transactions you cannot categorise, flag them. They are likely personal drawings.

Step 3: Calculate the Net Balance

Add up all credits (money you put in or expenses owed to you) and all debits (money taken out or personal expenses paid by the company). Subtract debits from credits. If the result is negative, your DLA is overdrawn. That negative figure is the loan balance subject to S455.

For example:

  • Credits: £15,000 (loans to company) + £2,000 (expense reimbursements) = £17,000
  • Debits: £40,000 (personal drawings) + £5,000 (personal credit card paid by company) = £45,000
  • Net balance: £17,000 - £45,000 = -£28,000 (overdrawn)

That £28,000 is the loan balance.

Step 4: Check for Dividend Documentation

If you have taken dividends during the year, make sure you have a dividend voucher and board minutes for each dividend. The voucher should state the date, amount, and the shareholder receiving it. Without this documentation, HMRC can treat the payment as a director's loan, not a dividend. That means it becomes subject to S455 tax.

If you are missing documentation, prepare it before the year end. You can backdate dividend vouchers as long as the dividend was declared in the correct accounting period. But the company must have sufficient distributable profits at the time of the dividend.

Step 5: Identify and Clear the Overdrawn Balance

If your DLA is overdrawn at the year end, you have two options before the year end date:

  • Repay the loan: Transfer cash from your personal account to the company bank account. This clears the overdrawn balance. The repayment must be made before the year end date, not after. A repayment on 1 April for a 31 March year end counts as the next year.
  • Declare a dividend: If the company has retained profits, you can declare a dividend to cover the overdrawn balance. This converts the loan into a dividend. You need the dividend voucher and board minutes in place before the year end.

Do not try to clear the DLA by taking a salary or bonus after the year end. That creates a new transaction in the next year and does not fix the previous year's balance.

What Happens If You Do Not Reconcile Before Year End?

If your DLA is overdrawn at the year end and you do not clear it, the company must:

  • Report the overdrawn balance on the CT600 (corporation tax return)
  • Pay S455 tax at 33.75% within 9 months and 1 day of the year end
  • Disclose the loan in the company's annual accounts (as a debtor)

The loan also creates a benefit in kind if it is over £10,000 and interest-free. The company must report this on a P11D (benefits in kind form) and pay Class 1A NIC at 13.8% on the cash equivalent of the interest saved. HMRC's official rate of interest is currently 2.25% (as of April 2025). The benefit is calculated as the loan balance multiplied by the official rate, minus any interest actually paid.

For a £28,000 loan, the benefit in kind is £28,000 x 2.25% = £630. The company pays Class 1A NIC of £630 x 13.8% = £86.94. You pay income tax on the £630 benefit at your marginal rate.

As ICAEW qualified accountants, we see directors overlook this every year. The combination of S455 tax, P11D reporting, and benefit in kind charges makes an unreconciled DLA expensive.

Practical Tips for Managing Your DLA Throughout the Year

Reconciling at year end is reactive. The better approach is to manage the DLA throughout the year. Here is how:

Use a Separate Credit Card for Personal Expenses

Do not use the company debit card for personal spending. If you must, use a separate personal credit card and reimburse the company immediately. This keeps the DLA clean.

Run a DLA Report Monthly

Most accounting software allows you to run a DLA report at any time. Set a reminder to check it monthly. If the balance is overdrawn, decide whether to repay it or declare a dividend within the same month.

Document Everything

Every transaction between you and the company should have a clear paper trail. Dividend vouchers, expense receipts, loan agreements (if you lend money to the company). HMRC can ask for these documents up to 6 years after the year end.

Use Alphabet Shares for Spouses

If your spouse is a shareholder, consider alphabet shares. These allow you to pay different dividend rates to different shareholders. This is useful if you want to allocate dividends to a spouse who is a director but does not take a salary. But be careful with settlement legislation if shares are gifted to a non-spouse.

When S455 Tax Is Reclaimable

If you do pay S455 tax, you can reclaim it once the loan is repaid. The repayment must be made to the company, not to HMRC. The company then claims the S455 tax back on the CT600 for the year the loan is repaid.

The reclaim is not automatic. You must complete the relevant box on the CT600 and provide details of the repayment. HMRC will refund the tax, but it takes time. Typically 4 to 8 weeks after the return is filed.

If the loan is written off, the S455 tax is not reclaimable. Instead, the written-off amount is treated as a dividend in your hands and taxed accordingly. The company cannot claim a deduction for the write-off either.

Common Mistakes We See

Here are the most common errors directors make with their DLA:

  • Treating personal drawings as "undrawn salary": If you have not processed it through payroll, it is not salary. It is a loan.
  • Forgetting to include personal credit card payments: If the company pays your personal credit card bill, that is a DLA debit.
  • Assuming dividends are automatic: Without a dividend voucher, HMRC treats the payment as a loan.
  • Clearing the DLA after year end: A repayment on 2 April does not fix a 31 March overdrawn balance.
  • Not checking the DLA before filing the CT600: The CT600 asks for the highest overdrawn balance during the year, not just the year end balance.

What to Do If You Have an Overdrawn DLA Right Now

If you are reading this and your year end is approaching, here is your action plan:

  1. Run your DLA report today.
  2. Identify the overdrawn balance.
  3. Check if you have distributable profits to cover a dividend.
  4. If yes, declare a dividend before the year end. Prepare the voucher and minutes.
  5. If no, transfer personal funds to the company to clear the balance before the year end.
  6. If you cannot clear it, prepare to pay S455 tax and report the loan on the CT600.

If you need help reconciling your DLA or planning your year end, contact our team. We work with limited company directors across the UK, from Shoreditch startups to Birmingham manufacturers. We can review your DLA, identify risks, and help you avoid unnecessary tax charges.

For more on director pay and dividends, see our full guide on director pay and dividends. If you are considering incorporating, our incorporation guide covers the early decisions that affect your DLA structure.