In the world of owner-managed businesses, the Director’s Loan Account (DLA) is often treated as a flexible safety net. Whether it’s covering a personal expense or taking a short-term "advance" on future dividends, it’s a tool many directors rely on for liquidity.
However, as of April 6, 2026, that safety net has become significantly more expensive. If you aren’t careful, an overdrawn DLA could result in a tax bill that takes a massive bite out of your company’s cash flow.
The Headline: Section 455 is Now 35.75%
For any new loans or advances taken from the company on or after April 6, 2026, the Section 455 (s.455) tax rate has increased to 35.75% (up from 33.75%).
While this tax is technically temporary—HMRC repays it to the company once the loan is repaid—it represents a significant "interest-free loan" from your business to the government. At a time when services inflation is sitting at 6% and interest rates remain high, losing 35.75% of a loan’s value to HMRC is a liquidity drain most SMEs simply cannot afford.
Why the Increase? The Dividend Link
The s.455 rate isn’t plucked out of thin air; it is strictly tied to the higher rate of dividend tax.
The government’s logic is simple: they don't want directors to avoid paying personal dividend tax by simply "borrowing" money from their company indefinitely. By keeping the s.455 rate identical to the dividend tax rate, the incentive to leave loans unpaid is removed. As dividend taxes have climbed to meet fiscal targets in 2026, the cost of your DLA has climbed right along with them.
The Danger Zone: The "Nine Month" Rule
The good news is that s.455 tax is only payable if the loan remains outstanding nine months and one day after the end of your accounting period.
If your year-end was December 31, 2025, and you took a loan in early 2026, you have until October 1, 2026, to clear that balance before the 35.75% charge kicks in.
Strategies to Clear the Balance
To avoid this hefty tax hit, you need a proactive repayment strategy. Here are three common routes:
The Dividend Route: Formally declare a dividend to offset the loan balance. Note: You must have sufficient retained profits to do this, and you will personally owe dividend tax on that amount.
The Salary/Bonus Route: Process a bonus through PAYE. The net pay can be used to credit the DLA. This incurs National Insurance and Income Tax but avoids the s.455 trap.
Physical Repayment: Paying the cash back into the business from personal savings.
A Word of Warning: "Bed and Breakfasting" HMRC is wise to directors who repay a loan just before the deadline only to take it back out a few days later. These "bed and breakfasting" rules can void the repayment for tax purposes, leaving you with a surprise 35.75% bill anyway
How We Can Help
Managing an overdrawn director’s loan is a balancing act between personal cash flow and corporate tax efficiency. With the rate now at 35.75%, the stakes for getting it wrong are higher than ever.
We can help you review your DLA position, calculate your potential liability, and structure a repayment plan that keeps your cash where it belongs—in your business.
Is your Director’s Loan Account creeping up? Contact TWJ today for a DLA health check.
Share this post:
