Cash Out, Clock On: The Director’s Loan Account Check UK SMEs Should Run Before December
Photo: Francisclarke, CC BY-SA 4.0, via Wikimedia Commons
With December in sight, many owner-managers will be tempted to move money out of the company account. It may be labelled a festive bonus, a salary advance or simply a temporary transfer. HM Revenue & Customs is less interested in the label than in the legal and accounting reality. If the company has provided money to a director and the amount is not remuneration, a properly declared dividend or a reimbursed expense, it is likely to sit in the director’s loan account.
That account is one of the most quietly dangerous ledgers in a small company. It can look benign for months, then produce a corporation tax charge, a benefit-in-kind report and an awkward conversation with the accountant just as the January filing window fills up.
The account that does not announce itself
A director’s loan account tracks what the company owes the director and what the director owes the company. It is not a current account. When the balance is overdrawn, the company has made a loan to a participator in a close company. That is the technical trigger for section 455 of the Corporation Tax Act 2010.
The charge is currently 33.75% of the outstanding loan balance. It falls due nine months and one day after the end of the accounting period in which the loan was made. For a company with a 31 March 2026 year-end, that deadline lands on 1 January 2027, right in the middle of the January compliance crunch. For a 31 December 2026 year-end, the section 455 deadline would fall on 1 October 2027.
The charge is sometimes described as a penalty. It is not. It is a payment on account, reclaimable when the loan is repaid, but the cash-flow effect is real. A company that has already spent the money may find itself funding a tax charge out of working capital while it waits for repayment.
The festive advance trap
The most common mistake is to treat a payment as a loan when it is really remuneration. If a director takes a bonus, it should go through payroll with PAYE and National Insurance contributions accounted for at the right time. Calling it a loan does not change the tax treatment if there is no intention to repay.
A salary advance is different again. It may be a timing matter, but it still needs a clear payroll trail and a repayment plan. If the company later writes the balance off, HMRC may treat the amount as earnings. The same risk arises where a loan is never documented and the director treats the money as their own.
Interest-free or low-interest loans can also create a beneficial loan benefit. Where the loan exceeds £10,000 and the interest charged is below the official rate, a P11D entry is usually required by 6 July following the end of the tax year. That is a separate reporting obligation from the company’s corporation tax return.
Spot the problem before the accountant does
The warning signs are usually visible by late autumn. A director’s loan account is overdrawn and no repayment date has been agreed. Personal expenses have been paid from the company account and coded to the loan account without a supporting explanation. A dividend has been voted but the paperwork does not match the cash movement. Or a series of small transfers has quietly built into a material balance.
A monthly reconciliation is the simplest control. The director’s loan account should be reviewed alongside the bank statements, not at the end of the year. Each movement should have a clear description: remuneration, dividend, expense reimbursement, loan advance or loan repayment. If the description is vague, the tax treatment is probably vague too.
It also helps to separate the director’s personal spending from company spending. A company credit card used for personal items should be cleared promptly or posted to the loan account with a clear record. The longer a mixed-use balance sits there, the harder it is to reconstruct.
The paperwork that matters
A loan to a director should be supported by a board minute or written record. A short loan agreement is better still, particularly where the balance is substantial. It should set out the amount, the interest rate, the repayment terms and the commercial reason for the loan. If the company charges interest, the director should pay it. If the loan is interest-free, the benefit-in-kind position should be checked.
The company’s accounts should disclose the loan in the usual way, and the corporation tax return should include the supplementary pages where a section 455 charge arises. The P11D position should be reviewed separately. These are not filing formalities to leave until the last week of January.
A practical clean-up plan
Start with a ledger extract showing every movement in the director’s loan account for the current accounting period. Decide what each item actually is. Repay or reclassify anything that has been misposted. If a dividend was intended, check that it was properly declared and that there are sufficient distributable reserves. If a bonus was intended, put it through payroll.
Where a loan will remain outstanding, agree a repayment schedule and document it. Check the section 455 deadline for the relevant accounting period and make sure the cash is available. Review whether a P11D is needed. Then speak to the company’s accountant before the December rush turns into a January problem.
The festive period is not the issue. Informal cash movements are. A director’s loan account that is reviewed, documented and repaid on time is manageable. One that is left to drift can turn a short-term cash-flow fix into a spring tax bill and a much longer clean-up exercise.
