Director’s Loan Write-Off: Tax Implications Every Business Owner Should Know

Directors of limited companies often use a director’s loan account to record money moving between themselves and their company. While these transactions are common, an overdrawn director’s loan account can create unexpected tax liabilities for both the director and the company.

Before deciding to write off a director’s loan, it is important to understand the tax and National Insurance consequences involved.

What Is a Director’s Loan Account?

A director’s loan account (DLA) records financial transactions between a company and its director(s) that are separate from salary, dividends, or expense reimbursements.

Examples include:

• A director lending personal funds to the company.
• The company paying personal expenses on behalf of the director.
• A director withdrawing money from the company that is not salary or dividends.

Maintaining accurate records of these transactions is essential to ensure compliance with HMRC requirements.

Tax Issues with an Overdrawn Director’s Loan Account

A director’s loan account becomes overdrawn when the director owes money to the company.

Benefit in Kind Charges

If the outstanding loan balance exceeds £10,000 at any point during the tax year, the director may face a Benefit in Kind (BIK) tax charge.

In addition, the company will be required to pay Class 1A National Insurance Contributions (NICs) at 15% on the taxable benefit.

Section 455 Tax

Where the loan remains unpaid at the end of the company’s accounting period and is still outstanding nine months and one day after the year-end, the company must pay Section 455 tax.

For the 2026/27 tax year, the Section 455 tax rate is 35.75%, aligning with the higher dividend tax rate.

Can Writing Off a Director’s Loan Solve the Problem?

Writing off an overdrawn director’s loan may seem like an easy way to avoid Section 455 tax. However, this approach creates its own tax implications.

When a director’s loan is waived, released, or written off, HMRC generally treats the amount as a dividend distribution received by the director.

Tax Consequences for the Director

The amount written off is taxed as dividend income.

For loan write-offs occurring on or after 6 April 2026, dividend tax rates are:

• 10.75% for basic-rate taxpayers
• 35.75% for higher-rate taxpayers
• 39.35% for additional-rate taxpayers

The director must report the written-off amount on their Self Assessment tax return.

What If the Director Is Also an Employee?

A loan write-off could potentially fall within the employment income rules. However, the dividend distribution rules take priority, ensuring the director is not taxed twice on the same amount.

Tax Consequences for the Company

From the company’s perspective, the written-off amount is treated as a distribution rather than a business expense.

As a result:

• The company cannot claim corporation tax relief on the amount written off.
• Any previously paid Section 455 tax may become recoverable.
• The repayment can be claimed nine months and one day after the end of the accounting period in which the loan was written off.

National Insurance Implications

One often-overlooked consequence of writing off a director’s loan is National Insurance.

Although HMRC treats the write-off as a dividend for income tax purposes, it is generally treated as earnings for National Insurance purposes.

This means:

• The director may have to pay Class 1 NICs.
• The company may also have to pay employer’s Class 1 NICs.

In some cases, it may be possible to argue that the write-off represents a distribution of shareholders’ funds rather than remuneration for services. If HMRC accepts this position, National Insurance contributions may not apply.

Is There a Better Alternative?

For directors who would otherwise pay higher or additional-rate dividend tax, leaving the loan outstanding and paying Section 455 tax may be a more tax-efficient option.

The key advantages include:

• No National Insurance liability.
• Section 455 tax can be reclaimed once the loan is repaid.
• Potentially lower overall tax costs compared to a loan write-off.

Every situation is different, so professional tax advice should be sought before deciding whether to write off a director’s loan or repay it.

Final Thoughts

Writing off a director’s loan may appear to be a straightforward solution to an overdrawn director’s loan account, but it can trigger significant tax and National Insurance consequences.

Before taking action, directors should carefully assess the impact on both their personal tax position and the company’s finances. Understanding the available options can help avoid unnecessary tax costs and ensure compliance with HMRC regulations.

                                             For more information, Book a Free Consultation