If your limited company has ever lent you money, or paid a personal bill on your behalf, your director's loan account (DLA) is probably overdrawn. An overdrawn DLA at your company's year end can trigger a 33.75% tax charge under Section 455 of the Corporation Tax Act 2010. That is a significant cost if you miss the deadline to clear it.
Reconciling your director's loan account before year end is not optional. It is a core part of year end planning that every director should understand. This guide covers what S455 tax is, how to reconcile the account, the key deadlines, and what happens if you miss them.
What Is a Director's Loan Account?
A director's loan account tracks the money flowing between you and your company. It is not a bank account. It is a record in your company's nominal ledger that shows what the company owes you (credit balance) or what you owe the company (debit balance).
Every transaction between you and the company should pass through this account. Common entries include:
- Money you put into the company (capital introduced, loans to the company)
- Money you take out (salary, dividends, expense reimbursements, personal bills paid by the company)
- Assets you transfer to or from the company
A credit balance means the company owes you money. That is normal and usually tax-free. A debit balance means you owe the company money. That is where the problems start.
When Does S455 Tax Apply?
Section 455 applies when a director's loan account is overdrawn (debit balance) at the company's year end, and the loan is not repaid within 9 months and 1 day of that year end.
The tax is 33.75% of the overdrawn amount. It is payable by the company, not by you personally. The company must pay it as part of its corporation tax bill, due 9 months and 1 day after the year end.
There are some exceptions. S455 does not apply if:
- The total overdrawn balance across all directors is below £10,000 and the loan is repaid within 9 months of the year end
- The loan is a qualifying loan (e.g. for a house purchase, but strict conditions apply)
- The loan is made in the ordinary course of a money-lending business
For most small limited companies, these exceptions do not apply. If your DLA is overdrawn at year end, plan for the 33.75% charge.
How to Reconcile Your Director's Loan Account Before Year End
Reconciling the DLA means checking every transaction in the account against the supporting documents. Here is the step by step process.
Step 1: Run the DLA Nominal Ledger Report
Your accounting software (Xero, FreeAgent, QuickBooks, Sage) will have a report showing the DLA balance. Run it for the full year. The report shows every transaction posted to the account.
Check the opening balance matches the closing balance from the previous year. If it does not, you have a prior year error to fix first.
Step 2: Identify Every Transaction
Go through each transaction in the report. Common items include:
- Dividends voted (credit to DLA, reduces the overdrawn balance)
- Salary paid (credit to DLA if paid via payroll, or debit if paid personally and then reimbursed)
- Personal expenses paid by the company (debit to DLA)
- Company expenses paid personally by you (credit to DLA)
- Cash transfers between your personal account and the company account
- Loan repayments you made to the company
For each transaction, check you have the supporting document. A dividend needs a dividend voucher and board minutes. A personal expense needs a receipt showing it was paid by the company. A cash transfer needs a bank statement showing the movement.
Step 3: Reconcile Against Bank Statements
Cross reference every cash movement in the DLA against the company bank account. If the company paid a personal credit card bill of £2,400 on 15 March, that should show as a debit in the DLA on that date. If it does not, the DLA is understated and the overdrawn balance is larger than you think.
Also check the personal bank account for any company money that went in by mistake. A client paying into your personal account is a debit to the DLA. It must be recorded.
Step 4: Check for Missed Entries
Common missed entries include:
- Personal use of a company credit card (each transaction is a separate loan)
- Company paying your personal tax bill (HMRC payments, self assessment)
- Company paying your personal pension contributions (unless it is a company pension scheme)
- Assets you bought personally but the company uses (should be recorded as a loan from you to the company, credit to DLA)
If you find any of these, post the correcting journal entries before you finalise the year end accounts.
Step 5: Calculate the Corrected Balance
After all corrections, the DLA balance is the true amount owed. If it is a debit balance, that is the amount potentially subject to S455.
Here is a worked example. A director in Manchester runs a 3-employee software consultancy. At the start of the year, the DLA was £2,400 credit (company owed the director). During the year:
- Director paid £18,000 of company expenses personally (credit to DLA)
- Company paid director's personal credit card bills totalling £14,200 (debit to DLA)
- Director took a cash loan of £25,000 from the company (debit to DLA)
- Company paid director's self assessment tax bill of £8,600 (debit to DLA)
- Director received £36,000 in dividends (credit to DLA)
The DLA calculation:
- Opening balance: £2,400 credit
- Plus credits: £18,000 + £36,000 = £54,000 credit
- Minus debits: £14,200 + £25,000 + £8,600 = £47,800 debit
- Closing balance: £2,400 + £54,000 - £47,800 = £8,600 credit
In this case, the DLA is in credit. No S455 issue. But if the debits had been higher, or the dividends lower, the balance could easily flip to a debit.
The 9 Month Repayment Window
If your DLA is overdrawn at year end, you have 9 months and 1 day to repay the balance. For a company with a 31 March year end, the deadline is 1 January of the following year. For a 30 April year end, it is 1 February.
If you repay within this window, the company does not have to pay S455 tax. The loan is treated as repaid, and no charge arises.
If you do not repay, the company must pay 33.75% of the overdrawn amount to HMRC. The company reports this on its corporation tax return (CT600) and pays it as part of the corporation tax bill.
If the loan is later repaid, the company can reclaim the S455 tax. But that is a separate process and takes time. It is far better to avoid the charge in the first place.
How to Clear an Overdrawn DLA Before the Deadline
You have several options to clear the balance:
- Repay cash directly from your personal account to the company. This is the simplest method. The repayment reduces the debit balance.
- Vote a dividend if the company has sufficient retained profits. A dividend credited to the DLA reduces the debit. Make sure you follow the correct procedure: board minutes, dividend voucher, and sufficient distributable reserves.
- Pay yourself a salary through payroll. This credits the DLA if you have not already taken the salary. But be careful with payroll deadlines and PAYE/NIC.
- Reimburse company expenses that you paid personally but never claimed. If you have receipts for business expenses you paid from your personal account, post them as a credit to the DLA.
One warning: do not use a "bed and breakfasting" arrangement. If you repay the loan just before year end and then immediately take it out again, HMRC can treat the repayment as not genuine. The repayment must be real and permanent.
What Happens if You Miss the Deadline
If the loan is still outstanding after 9 months and 1 day, the company pays the 33.75% S455 tax. The company reports the loan on the CT600 and pays the tax with its corporation tax.
The company can reclaim the tax later if the loan is repaid. But the reclaim process is not automatic. You must submit a claim to HMRC, and it can take weeks or months to get the money back.
If the loan is never repaid, the company is stuck with the tax. HMRC also has the power to treat the loan as a distribution (dividend) if it is written off, which triggers income tax on you personally.
Practical Year End Checklist for Directors
Use this checklist before your company's year end:
- Run the DLA report from your accounting software
- Reconcile every transaction against bank statements and receipts
- Post any missing entries (personal expenses paid by company, company expenses paid personally)
- Calculate the corrected closing balance
- If the balance is overdrawn, plan how to clear it before the 9 month deadline
- Document all repayments and dividends properly
- Check the balance again after the year end to confirm it is cleared
As ICAEW qualified accountants, we see directors caught out by S455 every year. The tax is avoidable with proper planning. If your DLA is overdrawn, speak to our team before the year end to agree a plan.
Common Mistakes Directors Make
Here are the most frequent errors we see:
- Forgetting the personal credit card. The company pays the card bill but the director does not record the personal element. The DLA shows a smaller debit than it should.
- Assuming dividends are automatic. You cannot just credit a dividend to the DLA without proper paperwork. HMRC expects dividend vouchers and board minutes.
- Mixing business and personal bank accounts. If a client pays into your personal account, that is a loan from the company to you. It must be recorded.
- Ignoring the 9 month window. Some directors think they can repay after the corporation tax deadline. They cannot. The repayment must happen within 9 months and 1 day of the year end.
When to Get Professional Help
If your DLA is overdrawn by more than £10,000, or if you have complex transactions (asset transfers, multiple directors, group companies), get professional advice. The S455 rules are strict, and the penalties for getting it wrong are significant.
We handle DLA reconciliations as part of our year end accounting services. If you are unsure about your DLA balance, book a call before the year end. It is much cheaper to fix it now than to pay the 33.75% charge later.