Directors’ Loan Accounts: Where Finance Leaders Trip Up and What HMRC Is Now Challenging

Directors’ Loan Accounts: Where Finance Leaders Trip Up and What HMRC Is Now Challenging

By Adrian Lawrence, Managing Director, FD Capital Recruitment

Directors’ loan accounts are one of those topics that don’t make headlines but quietly cause more problems for UK finance leaders than almost any other area of day-to-day tax compliance. And the stakes have just got higher. From 6 April 2026, the Section 455 tax charge on overdrawn DLAs rises from 33.75% to 35.75%, following the November 2025 Budget’s 2-point increase to the upper dividend rate. HMRC has also become visibly more aggressive on DLA compliance over the last 18 months, with the 2024 update to the Targeted Anti-Avoidance Rule and recent tribunal decisions in Quillan v HMRC and Powell v HMRC both reinforcing the direction of travel.

This piece is written for two audiences: the FD or finance manager wanting to make sure their own DLA practice is clean, and the CEO, founder or investor trying to work out whether it actually is. Because — and this is the angle I want to start with — a DLA is one of the most diagnostic documents in an owner-managed business. Experienced investors and experienced recruiters read one for what it says about the finance function, not just what it says about the tax position.

What a DLA really tells an experienced recruiter or investor

When I’m doing early-stage due diligence on a business — either for a client considering an FD hire, or when an incoming fractional is assessing the state of a finance function they’re about to join — the DLA is one of the first things I ask to see. Not because I’m a tax adviser (I’m not), but because a messy DLA is one of the most reliable proxy signals I know for broader finance function problems.

Investors, PE sponsors and seasoned NEDs use it the same way. The logic is simple. A DLA that’s well-maintained, properly reconciled, reviewed each quarter, correctly allocated between loans spanning the 6 April rate change, and disclosed cleanly on the CT600A, tells you something about the culture of the finance function. Financial maturity, governance standards, leadership discipline. A DLA that’s a dumping ground for personal expenses, historical anomalies and unexplained balances tells you something else — and in my experience, that something else is rarely contained to the DLA. A messy DLA almost always correlates with wider issues: weak month-end close, inconsistent board reporting, patchy expense controls, unreconciled inter-company accounts.

That’s why DLA hygiene comes up in the first 30 minutes of a serious commercial conversation with a PE buyer or a Quality of Earnings provider. It’s cheap to look at, hard to fake, and a surprisingly good predictor of how much other remediation will be needed.

Where finance leaders actually trip up

There are six recurring failure modes I see — most of them fixable, but all of them evidence of finance function drift if they’re left uncorrected.

1. Treating the DLA as a convenience account. The classic pattern: the director’s company card pays for a holiday, a school fee, a house renovation, and the bookkeeper parks it in the DLA with a note to “sort at year-end.” Year-end comes, the balance has ballooned, the company is staring at a Section 455 charge nobody budgeted for, and the options are an unplanned dividend (with its own personal tax consequences), a bonus via PAYE (expensive), or paying the 33.75% charge and reclaiming it later (cash-flow-destructive). None of those conversations should be happening at year-end. They should be happening monthly.

2. Missing the beneficial loan rules. A loan over £10,000 at any point during the tax year triggers beneficial loan rules — the director pays income tax on the benefit-in-kind (HMRC’s current official rate is 3.75%), and the company pays Class 1A NIC. Plenty of FDs calculate Section 455 correctly but overlook the BiK entirely. HMRC employer compliance visits pick this up with depressing regularity.

3. Circular repayments and bed-and-breakfasting. Repaying the loan a few days before the 9-month deadline and redrawing it immediately afterwards used to be a reasonably common workaround. It isn’t any longer. The 30-day rule and the broader “arrangements” rule catch almost every variation of this, and the 2024 TAAR update has widened HMRC’s hand further. Directors still try it. FDs should know better than to sign it off.

4. Sloppy allocation when loans span the April 2026 rate change. This one is new and genuinely important. Loans advanced before 6 April 2026 attract Section 455 at 33.75%; loans advanced on or after attract it at 35.75%. Where a director makes partial repayments after the rate change, the company and the director can jointly specify which loans the repayment is allocated against — and doing so in writing, at the time, can materially reduce the Section 455 exposure. If no allocation is made, HMRC will default to the rule in Clayton’s case (oldest debts first), which in many scenarios produces a worse outcome. This is one of those details where a disciplined FD saves the business real money, and a drifting one doesn’t.

5. Loans to associates not treated as loans to participators. Section 455 extends to loans made to persons connected with a participator — spouses, adult children, trusts of which the participator is a beneficiary. A loan to the founder’s spouse is, for Section 455 purposes, a loan to the founder. Plenty of finance functions don’t flag this because the spouse isn’t in the shareholder register.

6. Written-off loans handled as tax-neutral. Releasing or writing off a DLA isn’t tax-neutral. For the director it’s treated as a distribution (for shareholders) or as employment income (for non-shareholder directors), with corresponding income tax and PAYE consequences. For the company, Section 455 relief may still be available, but the interaction with the personal tax charge needs to be planned carefully. I’ve seen write-offs signed off without anyone at board level understanding the full picture.

What HMRC is now actively challenging

The direction of HMRC travel over the last 18 months has been clear, and worth understanding even if your DLA is in good shape.

Informal drawings with no paperwork. HMRC’s enquiry teams are taking a harder line on drawings that haven’t been properly characterised as salary, dividend or loan at the point they occurred. Retrospectively re-labelling a £40,000 personal withdrawal as a “loan the director always intended to repay” is less likely to stick than it used to be.

Disguised remuneration. Where HMRC concludes that what’s been called a loan is in substance remuneration, the consequences escalate quickly — PAYE, NIC, interest and penalties, all on a charge the company didn’t expect.

Circular and artificial repayments. Anything that looks like a repayment purely engineered to avoid the Section 455 charge is now squarely in HMRC’s sights. The 2024 TAAR update gave them further statutory footing, and the recent tribunal decisions in Quillan and Powell indicate an enforcement appetite that isn’t softening.

Poor CT600A disclosure. Every loan to a participator must be recorded on the CT600A supplementary page, including loans repaid within the nine-month window and therefore not attracting Section 455. Omitting these isn’t just a disclosure failure; it’s the kind of red flag that escalates an HMRC enquiry from routine to painful.

BiK underreporting. Employer compliance visits consistently find beneficial loan BiK charges that haven’t been reported on P11D. The £10,000 threshold is low enough that a surprising number of director loans tip over it.

What good DLA governance actually looks like

In a well-run finance function, the DLA is boring — and that’s the point. The hallmarks:

• Monthly reconciliation as part of month-end close, not an annual scramble. The balance is known and trending, not discovered at year-end.
• Clear policy on what goes through the DLA and what doesn’t, agreed at board level and followed consistently.
• Quarterly review by the FD and the director personally, with a documented decision on treatment (salary top-up, dividend, genuine loan to be repaid).
• BiK assessment carried out in real time, with interest charged at the official rate where appropriate and paid during the year to avoid the charge entirely.
• Written allocation of repayments against specific loans, particularly for balances straddling the April 2026 rate change.
• Clean CT600A disclosure every year, including loans repaid inside the window.
• Documentation on file for anything unusual: releases, write-offs, loans to associates, significant balance changes.

None of this is technically difficult. It’s a matter of discipline and rhythm — and of the FD or finance manager treating the DLA as a first-order governance item rather than an administrative afterthought.

Why this matters at the hiring stage

When we’re briefing on an FD or fractional CFO mandate, I actively probe for DLA discipline during candidate conversations. Not because every business we place into has a DLA problem, but because how a candidate talks about DLA management tells me a lot about how they think about finance function hygiene generally.

The candidates I’m confident recommending talk about DLAs with calm precision: they describe the monthly rhythm, the policy, the board conversation. They mention the April 2026 rate change unprompted. They reference the beneficial loan threshold. They talk about why written allocation of repayments matters, and about how they’d present the issue to a founder who’d rather not be lectured.

The candidates I’m more cautious about either treat the subject as a minor technicality or, worse, tell war stories about how they “sorted out” a big DLA problem retrospectively. A finance leader who lets a DLA drift into a problem, and then presents its resolution as a credential, is telling you how they operate more generally. It’s the recruiter’s equivalent of a messy DLA itself.

The practical takeaway

If you’re a founder or CEO reading this and you’re not sure whether your DLA is in order, ask your FD or accountant for the current balance, the year-to-date movement, the Section 455 exposure at your year-end assuming no further action, and whether any portion of the balance is post-6 April 2026 (and therefore at the 35.75% rate). A finance leader who can answer those four questions inside ten minutes is almost certainly running the rest of the finance function with equivalent discipline. A finance leader who can’t, isn’t — and the DLA is probably the tip of a larger iceberg.

Related Finance and Professional Services Recruitment

• Fractional CFO — Part-time CFO support, typically in post within two weeks
• Finance Director Recruitment — Permanent FD appointments with governance discipline as standard
• Interim CFO — CFO at short notice for remediation, transitions and turnarounds
• Tax Director Recruitment — Senior tax leadership for complex compliance environments
• Risk and Compliance Recruitment — Governance, risk and regulatory professionals

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Sources and Further Reading

• HMRC Company Taxation Manual — CTM61500 onwards, Section 455 loans to participators
• HMRC Employment Income Manual — EIM26100 onwards, beneficial loans
• Gov.uk — Directors’ loans: overview and tax responsibilities
• Association of Taxation Technicians — DLA and beneficial loan technical guidance
• ICAEW Tax Faculty — technical updates on Section 455 and the April 2026 rate change
• Chartered Institute of Taxation — ongoing commentary on HMRC DLA enforcement