Tax on Overdrawn Director’s Loan Accounts – What’s Changing from April 2026?

From 6 April 2026, the tax cost of leaving a director’s loan account overdrawn is expected to increase. This is because it is linked to the higher rate of dividend tax, which is itself rising. Although final confirmation that this will apply to the Section 455 charge has not yet been issued, it appears likely. The rate is set to increase to 35.75% for loans made on or after that date. The current rate is 33.75% for loans made since 6 April 2022, and 32.5% for loans made before then.

Although the charge is temporary and repayable once the loan is cleared, it can create a significant cash flow burden for companies.

What is an overdrawn director’s loan account?

A director’s loan account becomes overdrawn when a director withdraws more money from the company than they have paid in, and those withdrawals are not treated as salary or dividends.

For close companies, this tax charge applies where a loan to a director or participator remains outstanding nine months and one day after the company’s year-end. The company must then pay tax at the applicable Section 455 rate. Most owner-managed and family companies fall within the definition of a close company.

Why this matters

The Section 455 tax rate broadly mirrors the higher rate of dividend tax and is designed to discourage directors from using loans as a long-term method of extracting funds.

With the higher rate, the cash flow impact becomes more pronounced. For example, a £100,000 loan outstanding after the deadline could trigger a £35,750 tax charge payable by the company until the loan is repaid and a claim for repayment is made.

Other points to consider

Section 455 is not the only issue. If a loan exceeds £10,000 and no (or insufficient) interest is charged, a benefit-in-kind charge may arise. The director pays income tax on the benefit and the company pays Class 1A National Insurance on it.  Anti-avoidance rules also prevent short-term repayments followed by re-borrowing purely to avoid the tax charge.

Clearing a loan via dividend requires sufficient distributable reserves and careful tax planning.

Planning ahead

With the rate increasing from April 2026, now is a sensible time to review any overdrawn balances and consider your profit extraction strategy.

Good planning can help manage cash flow, reduce tax exposure and ensure compliance with HMRC requirements.

If you would like to review your director’s loan account position, we would be happy to advise.  Please get in touch.

Written by Adam Dutton