What happens if you don’t repay a director’s loan account?

An overdrawn director’s loan account can lead to significant financial and legal implications and compromise a company’s financial stability. We offer detailed insights and actionable strategies to reduce any risks associated with them. 

What is a director’s loan account? 

A director’s loan account is the way by which company directors and limited companies can loan and borrow money from each other throughout a financial year. If the director owes the company, the account is overdrawn (debit). If the company owes the director, it's in credit. 

A limited company is a separate legal entity to shareholders and directors. Any funds exchanged between the company and its directors can have financial, tax and legal implications. 

Directors loan accounts are shown on the balance sheet of the company’s accounts and they are separate from other payments to directors such as salary or dividends. For full information on directors’ loans, see our Directors’ Loan Accounts Explained article. 

What is an overdrawn director’s loan account? 

An overdrawn director’s loan account occurs when a director takes money from the company without timely repayment. An overdrawn director’s loan account presents significant implications for both the director and the limited company. Remaining informed and proactive to safeguard the interests of all parties is vital for directors. 

What happens if you don’t repay a director’s loan account? 

When you owe money to your company, the director’s loan account shows an overdrawn balance. The repercussions can be severe and affect both the company and you as a director.  

If the balance is not repaid within nine months of the company’s financial year-end, the company may have to pay corporation tax on the loan. For instance, if your company has a 31st December year-end, you must repay an overdrawn director’s loan account by 30th September the following year to avoid tax consequences, 

Where a company faces insolvency, the consequences increase with tax penalties, personal liability for directors, and potential legal action.  

If the director’s loan was more than £10,000 and either: 

• the loan was interest free, or 
• you paid interest on the loan below the HMRC official rate of interest, 

then you may have income tax liabilities.  

What happens if the director’s loan account is repaid within nine months of end of the corporation tax accounting period? 

If you repay the director’s loan account within nine months of the corporation tax accounting period, there are corporation tax and reporting requirements for the company. The corporation tax is refundable when the loan is repaid, but there are also complex ‘bed and breakfasting’ rules to consider. 

Report the balance owed to the company on your company tax return using form CT600A “loans to participators by close companies”. As the corporation tax is not payable until nine months after the period end, if the director’s loan account is repaid within that time, there will be no tax to pay by the payment date. Close companies are defined here. 

If you took another loan of £5,000 or more up to 30 days before or after you repaid your director’s loan account balance (this is the bed and breakfasting rule mentioned above) the company must pay corporation tax at 33.75%. This is Section 455 tax or a S455 charge. This S455 tax can be reclaimed after the loan is permanently repaid.  

Where the director’s loan is more than £15,000 and you arranged another loan from the company when you repaid it, the company is also subject to S455 tax. 

What happens if the director’s loan account is not repaid within nine months of end of the corporation tax accounting period? 

The company should report the director’s loan balance on the CT600A form as described above and pay S455 tax at 33.75% of the loan amount. 

Interest is payable on until the corporation tax is paid, or the director’s loan is repaid. The company can reclaim the S455 tax when the director’s loan is repaid but not any interest paid. 

What happens if the director’s loan is written off and not repaid? 

As a director who is also a shareholder, a write-off of a director’s loan is treated as a ‘deemed distribution’. This means the write-off is taxed to income tax at dividend tax rates.  

HMRC generally view this as ‘emoluments’ so the company will need to deduct Class 1 National Insurance Contributions (NICS) through payroll. You will need to pay the income tax through your self-assessment tax return. 

It is also worth noting that for a director who is not also a shareholder, a written-off director’s loan would be treated more straightforwardly as employment income. The company would deduct income tax and NICs through PAYE. 

The write-off of the director’s loan won’t attract corporation tax relief. Talk to your accountant for advice on whether any S455 tax previously paid on the overdrawn director’s loan will be refundable. 

Do I need to worry about benefit in kind taxes or reporting? 

Yes, I’m afraid so! Where your director's loan balance is more than £10,000, you are a shareholder of the company and you didn’t pay interest on the loan at or above the official rate, the company must treat the loan is a benefit in kind. From 6th April 2025, the official rate of interest could go up or down throughout the tax year, so the calculation of the value of the benefit can be complex. 

The company must deduct Class 1 NICs on the value of the benefit and report the benefit on your P11D form. You must report the loan on your self-assessment tax return and pay income tax on the benefit.  

The benefit is broadly the amount of interest you would have had to pay if it were applied at the official rate. 

How can I reduce the risk of an overdrawn director’s loan account? 

Proactively managing the director’s loan account is crucial to prevent an overdrawn status. Here are strategic measures to consider:  

1. Regular review and reconciliation: Frequently check the director’s loan account to ensure accurate recording of transactions and adherence to limits.  
2. Timely repayment: Make sure to repay any borrowed amounts within the nine-month window to avoid tax penalties.  
3. Legal and financial consultation: Seek advice from licensed insolvency practitioners or financial advisors to navigate complex situations, such as cases of insolvency.  

What happens if the company becomes insolvent and there is an overdrawn director’s loan account? 

The treatment of an overdrawn director’s loan account becomes particularly critical in insolvency.  

The company must explore all avenues to settle outstanding amounts. This may involve negotiating repayment terms and considering writing off the loan. You should carefully consider the long-term implications when making your decision, including the directors’ personal financial situations and the company’s obligations to its creditors.  

The role of the liquidator in recovering overdrawn director's loan amounts 

During liquidation, an overdrawn director’s loan account is a potential asset for creditor repayment. The appointed liquidator will assess the director’s loan account’s status and take necessary actions to recover owed funds.  

Voluntary vs. compulsory liquidation  

The way a company enters liquidation can influence the treatment of overdrawn director’s loan account. Compulsory liquidation involves more rigorous examination of the company's financial dealings, including director’s loan account. It can lead to allegations of wrongful trading or inappropriate actions by directors.  

Last updated 24 Jul 2025 | First published 27 Mar 2024

Share

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.

---