Most company directors don't set out to take a loan from their own business. They take a transfer. The corporation tax bill isn't due for months, there's money in the account, the boiler has gone, and £2,000 moves across. It happens again in March, and again in July. By the year end there's £14,000 sitting in the accounts that isn't salary, isn't a dividend and isn't a business expense — and your accountant calls it your director's loan account.

It is completely legal, extremely common, and one of the more expensive mistakes you can drift into without noticing. Here is how the charge works, what it costs at the rates now in force, and how to get out of it cleanly.

What a director's loan account actually is

Your director's loan account is a running record of money owed between you and your limited company. Anything the company transfers to you, or pays out on your behalf, that isn't salary, a dividend or reimbursement of a genuine business expense goes on one side. Money you put in — the cash you injected at the start, business costs you paid personally, a repayment — goes on the other.

If the balance ends up in your favour, the company owes you money and there is no tax problem at all. If it ends up the other way, you owe the company, and that is what accountants mean by an 'overdrawn' loan account. Overdrawn is where the tax lives.

The reason any of this exists is that the company is legally separate from you. That separation is the entire point of incorporating, and the price of the protection it gives you is that the company's money isn't your money until it has been paid to you properly — through payroll, or as a dividend voted out of post-tax profit.

The nine-month deadline and the 35.75% charge

If your loan account is still overdrawn nine months and one day after the end of your company's accounting period, the company pays a tax charge on the amount outstanding. The rate is set at the dividend upper rate for the tax year the loan was made, which means loans made on or after 6 April 2026 are charged at 35.75%, and loans made between 6 April 2022 and 5 April 2026 at 33.75%.

The rate went up because dividend tax went up two percentage points in April 2026 — the ordinary rate from 8.75% to 10.75%, the upper rate from 33.75% to 35.75%. A great deal of advice online still quotes the old figure, so it is worth being specific about which one applies to you.

Putting real numbers on it. Say your company's year end is 31 December 2026, and across the year you take £4,000 a month out of the business — £48,000 in total. £12,000 of that was run through payroll as salary. £22,000 was covered by dividends properly voted from post-tax profits. That leaves £14,000 with nothing behind it, sitting in your loan account.

Do nothing, and on 1 October 2027 — nine months and a day after the year end — the company owes HMRC £14,000 × 35.75% = £5,005, on top of its normal corporation tax bill. Clear the £14,000 before that date by any legitimate route and the charge never arises at all.

The nine-month deadline isn't a penalty for doing something wrong. It's a deadline for deciding what the money actually was.

The £10,000 line most people miss

There's a second, quieter charge that catches people who thought they were fine. If your loan account is overdrawn by more than £10,000 at any point in the tax year, the loan counts as a benefit in kind unless you pay the company interest at least at HMRC's official rate. That rate is 3.75% for 2026/27, and HMRC now reviews it quarterly rather than fixing it once a year.

On the £14,000 balance above, that's roughly £525 of notional interest to report on a P11D, taxed on you personally at your marginal rate, with Class 1A National Insurance for the company on top. It isn't catastrophic, but it's paperwork and cash you hadn't budgeted for — and it's triggered by the balance at any moment in the year, not by the position at the year end. Briefly going £2,000 over the line in August counts.

You can sidestep it entirely by actually paying the company interest at or above the official rate. The company then has a little interest income to declare, and the benefit-in-kind charge disappears.

Getting the tax back is slower than you think

The charge is refundable, which is the bit that makes owners relax when they shouldn't. When the loan is repaid, released or written off, the company can reclaim the tax — but the refund isn't triggered by the repayment. It falls due nine months and one day after the end of the accounting period in which the repayment happened.

So a loan repaid in February 2028, in a company with a 31 December year end, produces a refund on 1 October 2029. The company is out of pocket for the better part of two years on money it has effectively already handed over twice. Treat the charge as a cash-flow event, not a deposit you'll get back next month.

Three ways to clear an overdrawn loan

**Vote a dividend.** The cleanest route, provided the company has distributable profits to cover it. The dividend clears the loan on paper and you pay dividend tax personally at 10.75% or 35.75% depending on your band. Minute it properly and date it before the deadline.

**Run it through payroll as a bonus.** The loan clears, but you pay income tax and both sides of National Insurance on the way. Usually the most expensive of the three, and normally reserved for a company with no profits available to distribute.

**Pay it back in cash.** Simple, if you have the money personally. What you can't do is repay it and take it straight back out: where a repayment of £5,000 or more is followed by new borrowing of £5,000 or more within 30 days, the rules match the two together and the repayment doesn't count for relief. There's a wider version of the same rule for larger balances where there was an arrangement to redraw. Bed-and-breakfasting the loan around the year end does not work.

What to do this week

Ask your accountant, or open your bookkeeping software, and find one number: the current balance on your director's loan account. Most owners genuinely don't know it, which is exactly how £14,000 accumulates by accident.

Then put two dates in the calendar — your year end, and nine months and a day after it. If the balance is overdrawn and drifting towards that window, decide now whether it becomes a dividend, a bonus or a repayment, while there's still time to make the profits and the paperwork line up. That decision is cheap in September. It costs 35.75% in October.

If the drawings are the real problem rather than a one-off, cash flow vs profit is the piece to read next — an overdrawn loan account is very often a profitable company with no cash discipline. And if you're taking money out because the business can't yet fund a proper salary, start with five numbers every owner should know.

Common questions

Can I repay my director's loan and take the money out again straight away?

No — that route was closed off years ago. Where a repayment of £5,000 or more is followed by a new loan of £5,000 or more within 30 days, the rules match the two transactions together and treat the repayment as though it never cleared the original balance. There is a further rule for larger balances where an arrangement to redraw existed, even outside the 30-day window. In practice, if the money leaves your personal account on 28 December and returns on 4 January, expect the charge to stand. A genuine repayment means the company keeps the money and carries on without it.

How do I get the 35.75% charge back after I repay the loan?

The company reclaims it, but not immediately. Relief is given for the accounting period in which the loan is repaid, released or written off, and the refund isn't due until nine months and one day after the end of that period. Repay a loan in February 2028 in a company with a 31 December year end and the money comes back on 1 October 2029. Claims can normally be made within four years of the end of the financial year the repayment falls in. The practical lesson is that the charge is a long, expensive interest-free loan to HMRC rather than a refundable deposit.

Is it illegal for a director to borrow from their own company?

No. Director's loans are lawful and routine, and a great many small company accounts include one. There are two things to get right. Company law requires shareholder approval for loans to a director above £10,000, which is a formality in a one-person company but should still be minuted. And the loan must be properly recorded in the books and disclosed in the accounts. The real problems are tax problems — and, if the company later becomes insolvent, a very practical one: an overdrawn loan account is a debt the liquidator will pursue you for personally.

What if my company owes me money instead?

That's a credit balance on the loan account, and it's a far happier position. It usually builds up from money you put in to get the business started, or business costs you paid out of your own pocket. Drawing that money back out is repayment of a debt rather than income, so there's no income tax or National Insurance on it, which makes it one of the few genuinely tax-free ways to take cash out of a company. You can also charge the company interest, though the company must deduct basic-rate tax and report it. Keep evidence of what created the balance.