Seven common director’s loan account mistakes to avoid

Directors’ loan accounts can be a source of confusion and overwhelm for company directors. Even seasoned business owners can make errors that lead to tax liabilities and compliance issues. Here we highlight common mistakes to avoid and show you how to manage your director’s loan account correctly from day one.

1. What exactly is a director’s loan account? 

A director’s loan account is money that the company has provided as a loan to a director. Conversely a director’s loan account with a positive balance is money a director has loaned to the company.  

If a company is newly incorporated and the director has been used to operating as a sole trader, it is crucial to remember the difference. A company is a separate legal entity from its directors. There are rules which govern what a director can and can’t do with that loan account, with tax consequences.  

A director's loan is also separate from salary, expenses and – if the director is also a shareholder – dividends. 

2. Can I leave the directors’ loan account administration until year end? 

It is definitely not advisable to leave the directors’ loan admin until the end of your accounting period. Good record-keeping throughout the year will make your life so much easier. Poor record-keeping can result in missing or incorrect deposits or withdrawals being tracked, leading to incorrect figures in the company accounts or errors in tax calculations. It is essential to maintain separate and accurate records for each director and each loan.   

3. What is a Section 455 tax charge? 

A Section 455 charge is a charge to corporation tax on a company which can occur if a director has an overdrawn director’s loan account at the company’s year-end. 

For more information about when and how Section 455 charges arise, read our article here. 

Another common error is repaying the director’s loan before the year-end and then withdrawing the funds again in the new financial year. HMRC has anti-avoidance rules to combat this practice, known as "bed and breakfasting".  This means the Section 455 tax charge will still apply. 

4. I am a director not an employee, do I need to consider benefit in kind rules? 

Unfortunately as a director, you do need to think about the benefit-in-kind (BIK) rules as well. HMRC considers directors to be employees for the purpose of the BIK rules. Interest-free loans to employees of £10,000 or more are classed as BIKs and are subject to tax and national insurance contributions (NIC). 

P11D reporting requirements may also apply.  

5. Why do I need to plan remuneration strategy for myself when this is my company? 

You need to plan your remuneration strategy because a company is a separate legal entity from you – this is the key difference between being a sole trader and incorporating your business into a limited company. 

Your overall remuneration package can include salary, dividends, and use of your director’s loan account. Mapping out how much to draw down, when, and in what form will help to avoid year-end surprises.    

6. Can I take loans from third parties instead to get around the directors’ loans rules? 

If you take loans from third parties to try and get around the directors’ loan rules you are highly likely to face tax liabilities under the ‘disguised remuneration’ rules. These are anti-avoidance rules brought in to prevent the use of trusts which disguised income as loans, but they are wide-ranging and easy to fall foul of. 

7. How do I put mistakes right? 

If mistakes have been made, there are ways to rectify them, including repaying the loan or declaring a dividend where there are sufficient distributable reserves and the director is a shareholder. The key step is to identify that mistakes have been made and seek professional advice to avoid making further errors. 

How TaxAssist Accountants can help 

To ensure you are managing directors’ loan accounts efficiently and correctly in your company, come and talk to our team at TaxAssist Accountants. We offer a free initial consultation to discuss your specific circumstances, call us now on 0208 441 6890 to arrange an appointment.

Last updated 2 Jul 2025 | First published 2 Jul 2025

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This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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