Directors Loan Tax Traps – and how to avoid them

In this article, we explain what directors’ loan accounts are, how overdrawn loans can trigger significant tax charges, and practical steps directors can take to avoid costly mistakes.

We also highlight recent HMRC changes and provide guidance on repayment options, documentation and tax planning opportunities to keep your loan account compliant and tax-efficient.

What are directors’ loan accounts?

It is common for director-shareholders in family and owner-managed companies to have a loan account with the company. This can take several forms:

• A formal loan advanced for personal use.
• Informal cash withdrawals for personal expenditure.
• Personal expenses paid directly by the company.

Overdrawn Director Loan Accounts

Where a director has borrowed more, overall, from the company than they have lent to it, the director’s loan account is said to be overdrawn. The balance is then usually cleared a few months after the year end, when profits have been determined. This is typically done by voting a dividend or paying a bonus.

With HMRC increasing the official tax charge on overdrawn, unpaid loans by two percentage points to 35.75% from 6 April 2026, directors must be even more cautious about how they handle these loans.

In some situations there are also personal tax consequences for the director, especially where a loan is large, cheap (interest below HMRC’s official rate) or is later written off or released.

What to do

• Tidy up your Director’s loan account. To avoid the 35.75% s455 Corporation Tax charge (effective 6 April 2026), ensure the overdrawn loan is cleared within nine months and one day of the accounting year-end.
• Options include: Repaying the loan in cash, paying a dividend, paying a bonus or writing off the loan (with careful consideration of tax consequences)
• If a company writes off a director’s loan, the outstanding amount is treated as income for tax purposes. This means the director is taxed as if they had received a dividend, and National Insurance contributions may also be payable by both the individual and the company. Therefore a written-off loan may not always be the most tax-efficient approach.
• Moving forward: Compare the cost of a directors’ loan against other borrowing options, such as dividends or commercial loans.

Increased HMRC attention

Over the past year, HMRC has stepped up its scrutiny of directors’ loans. This has included “nudge letters” to company directors where loans were written off, but may not have been properly reported on tax returns.

What to do

• Ensure all transactions are properly recorded in company minutes and accounts.
• Proper documentation can help justify timing and method of repayment if HMRC queries the account.