The Director’s Loan Account Trap: Why a Year-End Dividend Doesn’t Always Clear It July 7, 2026 Kieron McGahan Post in Uncategorized The Director's Loan Account Trap: Why a Year-End Dividend Doesn't Always Clear It If you run your own limited company and dip into it between dividends, there's a gap in how most directors think about their director's loan account (DLA) — and it's becoming more exposed by the month. Two separate tax tests apply to a DLA, and they don't run on the same clock. Getting the timing right on one doesn't mean you've dealt with the other. Test one: Section 455, and the nine-month window Section 455 tax charges the company at the dividend upper rate — rising to 35.75% for 2026/27 — on any loan to a director that's still outstanding nine months after the end of the accounting period in which it arose. Repay or clear it within that window and the charge doesn't bite. That nine-month grace period is often used deliberately. A director who's drawn heavily during the year can time a clearing dividend to land just inside the deadline, sometimes pushing the associated dividend tax liability into a later tax year. Used properly, and subject to the rules on repaying and then re-borrowing shortly after (the “bed and breakfasting” rules), that's a legitimate piece of planning. Test two: the £10,000 benefit-in-kind threshold The second test doesn't care about your year end, and it doesn't care about the nine-month window. If a director's loan exceeds £10,000 at any point while it's outstanding, a benefit-in-kind charge arises on the notional interest for however long the balance sat above that threshold — reported on a P11D, with Class 1A National Insurance due from the company. This is where the two tests pull apart. A loan that peaks at £18,000 in month seven of the year, then gets repaid in full well within the nine-month section 455 window, has still triggered a BIK charge for however many months it sat over £10,000. Clearing the balance — even clearing it early, even clearing it well inside the section 455 deadline — does nothing to undo a BIK charge that's already accrued. Section 455 looks at whether the loan is still there at a point in time. The BIK threshold looks at what happened along the way. A strategy built around the first test alone can walk straight past the second. The second blind spot: is the dividend even valid? There's a related issue that catches directors even when timing isn't the problem. A dividend can only be legally declared out of a company's distributable reserves — accumulated realised profits, not turnover, not the balance sitting in the bank account. Directors who treat every withdrawal above their salary as “dividend” by default, without checking whether the company actually had the reserves to support it, can end up with a dividend that was never legally declared at all. If that's the case, the funds withdrawn were never a dividend in the first place — which means the loan account was never really cleared, on either test above. It also opens up a separate problem: an unlawful dividend can be treated as a loan itself, or reclassified entirely, with knock-on consequences for both the company and the director personally. Why this matters more from now on None of this is new law. What's changed is how much of it HMRC can now see. From the 2025/26 tax year, close company directors report dividends and shareholdings on their Self Assessment return per company, rather than as one bundled figure — along with the highest shareholding percentage held during the year. HMRC can now see precisely which company paid what, to which director, and when, rather than a single number that used to blend everything together. On top of that, HMRC has a live consultation open on new reporting requirements for close companies, asking directly how they track transactions with directors and shareholders — including director loan accounts, how often balances are reconciled, and at what level of detail. That's not a proposal to change how you take money out of your company. It's HMRC gathering the groundwork for requiring far more granular reporting of DLA activity than exists today. Put together with the section 455 rate increase, the direction of travel is clear: less room for a DLA to be managed informally, and more visibility for HMRC when it isn't. What to check now If you're a director and you've drawn from your company outside of salary and formally declared dividends at any point this year, it's worth checking two things before your year end, not after it: Reconstruct the DLA's running balance through the year from your bookkeeping records — not just the year-end snapshot. If it went over £10,000 at any point, even briefly, a BIK charge may already have been triggered regardless of what happens next. Check that any dividend used to clear the balance was properly declared against actual distributable reserves, supported by board minutes and a dividend voucher — not simply a transfer with “dividend” written in the memo. Neither of these is complicated to get right if you build it into how you run drawings through the year. They're expensive to get wrong after the fact. If you'd like your DLA reviewed, or want to put a clearer process in place for how drawings are taken and documented going forward, get in touch.
The Director's Loan Account Trap: Why a Year-End Dividend Doesn't Always Clear It If you run your own limited company and dip into it between dividends, there's a gap in how most directors think about their director's loan account (DLA) — and it's becoming more exposed by the month. Two separate tax tests apply to a DLA, and they don't run on the same clock. Getting the timing right on one doesn't mean you've dealt with the other. Test one: Section 455, and the nine-month window Section 455 tax charges the company at the dividend upper rate — rising to 35.75% for 2026/27 — on any loan to a director that's still outstanding nine months after the end of the accounting period in which it arose. Repay or clear it within that window and the charge doesn't bite. That nine-month grace period is often used deliberately. A director who's drawn heavily during the year can time a clearing dividend to land just inside the deadline, sometimes pushing the associated dividend tax liability into a later tax year. Used properly, and subject to the rules on repaying and then re-borrowing shortly after (the “bed and breakfasting” rules), that's a legitimate piece of planning. Test two: the £10,000 benefit-in-kind threshold The second test doesn't care about your year end, and it doesn't care about the nine-month window. If a director's loan exceeds £10,000 at any point while it's outstanding, a benefit-in-kind charge arises on the notional interest for however long the balance sat above that threshold — reported on a P11D, with Class 1A National Insurance due from the company. This is where the two tests pull apart. A loan that peaks at £18,000 in month seven of the year, then gets repaid in full well within the nine-month section 455 window, has still triggered a BIK charge for however many months it sat over £10,000. Clearing the balance — even clearing it early, even clearing it well inside the section 455 deadline — does nothing to undo a BIK charge that's already accrued. Section 455 looks at whether the loan is still there at a point in time. The BIK threshold looks at what happened along the way. A strategy built around the first test alone can walk straight past the second. The second blind spot: is the dividend even valid? There's a related issue that catches directors even when timing isn't the problem. A dividend can only be legally declared out of a company's distributable reserves — accumulated realised profits, not turnover, not the balance sitting in the bank account. Directors who treat every withdrawal above their salary as “dividend” by default, without checking whether the company actually had the reserves to support it, can end up with a dividend that was never legally declared at all. If that's the case, the funds withdrawn were never a dividend in the first place — which means the loan account was never really cleared, on either test above. It also opens up a separate problem: an unlawful dividend can be treated as a loan itself, or reclassified entirely, with knock-on consequences for both the company and the director personally. Why this matters more from now on None of this is new law. What's changed is how much of it HMRC can now see. From the 2025/26 tax year, close company directors report dividends and shareholdings on their Self Assessment return per company, rather than as one bundled figure — along with the highest shareholding percentage held during the year. HMRC can now see precisely which company paid what, to which director, and when, rather than a single number that used to blend everything together. On top of that, HMRC has a live consultation open on new reporting requirements for close companies, asking directly how they track transactions with directors and shareholders — including director loan accounts, how often balances are reconciled, and at what level of detail. That's not a proposal to change how you take money out of your company. It's HMRC gathering the groundwork for requiring far more granular reporting of DLA activity than exists today. Put together with the section 455 rate increase, the direction of travel is clear: less room for a DLA to be managed informally, and more visibility for HMRC when it isn't. What to check now If you're a director and you've drawn from your company outside of salary and formally declared dividends at any point this year, it's worth checking two things before your year end, not after it: Reconstruct the DLA's running balance through the year from your bookkeeping records — not just the year-end snapshot. If it went over £10,000 at any point, even briefly, a BIK charge may already have been triggered regardless of what happens next. Check that any dividend used to clear the balance was properly declared against actual distributable reserves, supported by board minutes and a dividend voucher — not simply a transfer with “dividend” written in the memo. Neither of these is complicated to get right if you build it into how you run drawings through the year. They're expensive to get wrong after the fact. If you'd like your DLA reviewed, or want to put a clearer process in place for how drawings are taken and documented going forward, get in touch.