What's changing with tax on an overdrawn Director's Loan Account in April?

CREATED BY ROGER EDDOWES Published: 12/03/2026 @ 09:00AM #overdrawn Director's Loan Account #Section455 #HMRC #DirectorsLoans #CompanyInsolvency #UKTax

Here's the practical change: Section 455 rises from the 6th of April 2026. If there's an overdrawn Director's Loan Account, the timing of the loan suddenly matters more. This is a quick, conversational run-through of what shifts and why it matters ...

Overdrawn Director's Loan Account, Numbers in the red, A debt to repay

Most people only look closely at an overdrawn Director's Loan Account when the company hits a rough patch, but from April 2026, the tax cost of getting it wrong becomes even easier to feel. HMRC is increasing the Section 455 charge for close companies on loans made on or after the 6th of April 2026, and while it's 'only' two percentage points, it's the sort of change that can quietly turn an inconvenient balance into an expensive one.

It's not just the amount borrowed, but when the borrowing happened and whether it gets cleared in time!

The headline change is simple: the HMRC Section 455 rate moves up to 35.75% for relevant loans made on or after the 6th of April 2026. For context, loans taken on or after the 6th of April 2022 have been charged at 33.75%, and older loans can still be within the earlier 32.5% regime.

This is why conversations about an overdrawn Director's Loan Account increasingly start with dates, because the same balance can carry different outcomes depending on when it arose and how it's repaid.

It also helps to be clear about what Section 455 is actually doing. It isn't income tax on the director, and it isn't Corporation Tax in the usual trading-profit sense; it's a company-level charge that applies when a close company has effectively lent money to a participator, commonly a director-shareholder, and that loan remains outstanding beyond the permitted window. In plain terms, it's designed to stop directors taking value out as 'loans' indefinitely, and it sits right at the junction of Director's Loan Account rules and company director tax planning.

That junction is exactly where many businesses
drift into trouble!

A director takes drawings during a strong period, expects to sort it later through dividends, bonuses, or repayment, and then trading deteriorates, and the plan never lands. The result is an overdrawn Directors' Loan Account that becomes sticky just when cash is tight, and the Section 455 charge can feel like a penalty for being short of funds at precisely the wrong moment.

The 2026 increase matters because it raises the price of leaving things unresolved. If a loan is made after the 6th of April 2026 and remains within charge, the company is potentially paying 35.75% of the relevant balance as the Section 455 charge. That can be a meaningful sum for even modest overdrawing, and it's money the business may struggle to find if it is already under pressure from creditors, rising costs, or declining revenue.

It's worth separating the tax issue from the legal and insolvency reality, because they often collide. In an insolvency process, an overdrawn Director's Loan Account is typically treated as an asset of the company, meaning it can be pursued for the benefit of creditors rather than quietly disappearing. So the director can face two different kinds of pressure at once: the company's exposure under HMRC Section 455 and the practical demand to repay a debt that is now being scrutinised.

Some assume a write-off is an easy
solution, but it usually isn't!

Writing off an overdrawn Director's Loan Account can trigger company director tax consequences for the individual, because HMRC may treat the written-off amount as a distribution or earnings depending on the circumstances. And if the company later enters liquidation, the write-off itself won't necessarily stop enquiries or recovery action, particularly where an office-holder considers the transaction unfair or not properly justified.

Timing, documentation, and intent become unusually important under the Director's Loan Account rules. When the records are poor, the narrative gets filled in by someone else, whether that's HMRC, a liquidator, or a creditor's solicitor, and that is rarely comfortable for the director involved.

A well-kept loan account and a realistic plan to clear it are not just good housekeeping; they can be the difference between a contained tax issue and a wider dispute about conduct and recoveries.

The most useful way to think about the April 2026 change is that it increases the friction in the system. Directors already juggling cashflow may be tempted to let the account drift, but a higher HMRC Section 455 rate increases the downside of delay, and insolvency risk increases the chance that the balance will be actively chased anyway. Put bluntly, the room for “it'll be fine later” shrinks, because later can arrive with both a tax bill and a demand for repayment.

In practice, the sensible approach is to treat an overdrawn Director's Loan Account as an early-warning indicator rather than a footnote in the year-end accounts. If repayment looks uncertain, or the company is moving towards distress, getting advice early can clarify what is realistically possible, what the company can afford, and what the director's personal exposure might be under company director tax rules.

With the 6th of April 2026 rate change approaching, a little planning now can prevent a much more expensive conversation later about an overdrawn Director's Loan Account.

Until next time ...

ROGER EDDOWES
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About Roger Eddowes ...
Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach. Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.

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