Director’s loan accounts: HMRC scrutiny, new disclosures and what close companies should know

HMRC’s recent activity suggests that transactions between close companies and their owner-directors remain an area of increasing scrutiny. Two recent consultations have potential impacts on these companies and their participators. In addition, new self-assessment disclosure requirements now apply from the 2025/26 tax year onwards for directors of close companies, giving HMRC greater visibility of remuneration and profit extraction arrangements. We look at directors’ loan accounts (DLA) and the current landscape for close companies and their participators.

Directors’ loan accounts and current accounts: Why they matter more than ever 

For many owner-managed businesses, the director’s loan account and director’s current account are among the most important – and often misunderstood – balances in the company’s accounts. They represent the financial relationship between the director and the company and can have significant corporation tax, income tax and National Insurance implications if not properly managed. 

Director’s current account v director’s loan account 

In practice, the terms are often used interchangeably, but it is helpful to understand the difference between them. 

A director’s current account generally records routine transactions between the company and director. Typical entries include: 

• Salary credited to the director. 
• Dividends credited but not withdrawn. 
• Business expenses personally funded by the director. 
• Reimbursement of expenses. 

Further examples of transactions impacting these accounts can be found in HMRC internal guidance at NIM12016. 

Where the account is in credit, the company effectively owes money to the director. This is generally straightforward and funds can usually be withdrawn tax-free because they represent repayment of money already due to the director. 

A DLA is often used to describe the account once it becomes overdrawn. An overdrawn account arises when the director has withdrawn more from the company than has been credited through salary, dividends or other amounts due to them. 

Once a director owes money to the company, a number of specific tax rules can apply. 

Corporation tax charge on loans to participators 

The most significant company-level risk arises where a close company makes a loan (which includes incurring a debt to the close company) or advances money to a participator, typically a shareholder-director, or an associate of a participator. 

Where the loan/advance remains outstanding more than nine months and one day after the end of the accounting period, the company may become liable to the corporation tax charge under section 455 of the Corporation Tax Act 2010 (CTA 2010). 

The s.455 charge is intended to discourage individuals from extracting funds from companies in the form of loans or advances rather than taxable remuneration or dividends. Although the tax is generally repayable when the loan/advance is subsequently repaid, released or written off, the charge can create a significant cash-flow burden for the company. 

‘Bed and Breakfasting’ 

A refund of the s.455 charge (relief) for repayments of a loan/advance is only available for genuine or enduring repayments. Relief for a repayment close to the company’s year-end will not be given if shortly afterwards a new loan/advance is made (bed and breakfasting). Repayments are matched with original loans/advances in a specified order using 2 rules.  

1. The 30-day rule (CTA 2010 s.464ZA(1)) applies if within any 30-day period, the company:  

• Receives repayments totalling at least £5,000. 
• Makes loans/advances to the same person or their associate totalling at least £5,000 after the end of the accounting period in which the repayments were made. 

2. The arrangements rule (CTA 2010 s.464ZA(3)) applies if:  

• Immediately before a repayment is made, the total amount outstanding to the company by the person was at least £15,000.  
• At the time the amount is repaid, arrangements had been made to make a subsequent loan/advance to replace some or all of the amount repaid.  
• The amount payable under the arrangement by the company to the person or their associate is at least £5,000. 

In each situation, the repayment is treated as a repayment of the later loan/advance.

Benefit in kind issues 

Even where the s.455 charge does not arise, an overdrawn DLA may create an employment-related benefit. Where a director receives a loan from the company exceeding £10,000 and either pays no interest or pays interest below HMRC's official rate (currently 3.75%), a taxable beneficial loan benefit may arise. 

The value of the benefit is normally reported on form P11D and subjected to income tax on the director. The company may also be liable for Class 1A National Insurance contributions. 

In many owner-managed businesses, the beneficial loan rules are overlooked because attention is focused solely on the s.455 charge. 

Loan write-offs 

Particular care is required if a loan/advance is written off. Where a close company releases or writes off an amount owed by a participator, the amount written off is generally treated as a distribution for income tax purposes. For shareholder-directors, this often results in a dividend tax charge. The ordinary rate and higher rate of income tax on dividend income have increased by 2% from 2026-27 onwards to 10.75% and 35.75% respectively. 

Importantly, the write-off does not simply eliminate the debt; it can create a significant personal tax liability. Accordingly, advisers should consider whether alternative strategies are available before recommending a write-off. 

Avoiding problems 

The most common causes of DLA problems include: 

• Paying dividends without sufficient distributable reserves. 
• Recording personal expenditure through the company. 
• Failing to maintain up-to-date bookkeeping records. 
• Using the company's bank account as a personal account. 
• Relying on year-end journal entries to clear loan balances. 

A robust approach typically involves: 

• Regular monitoring of director balances. 
• Maintaining appropriate dividend paperwork. 
• Reviewing reserves before declaring dividends. 
• Considering remuneration planning throughout the year rather than shortly before the accounts are finalised. 

HMRC’s increasing focus on close companies 

The government considers the small business tax gap to be a significant compliance concern and has increasingly focused on transactions between close companies and their owners.  

HMRC has recently consulted on wider reporting of these transactions. The consultation seeks views on requiring close companies to report detailed information about transactions with participators, including: 

• Loans and loan repayments. 
• Cash withdrawals. 
• Dividends and other distributions. 
• Debts. 
• Transfers of assets between the company and participators. 

The intention is to provide HMRC with greater visibility of how owner-managed businesses extract profits and to improve compliance in relation to loans to participators and similar transactions. 

A further consultation Modernising the taxation of distributions and repayments of capital from companies was published in June 2026 which includes other proposals relevant to the regime for participators in close companies. ICAS produced an article on this consultation which you can read here. 

Although the consultation process remains ongoing and no final measures have yet been enacted, it’s clear that HMRC expects improved record keeping and reporting in this area. 

New self-assessment disclosures from 2025/26 

As a reminder, new disclosure requirements, arising from the Income Tax (Additional Information to be included in Returns) Regulations 2025, already apply for self-assessment returns relating to the 2025/26 tax year onwards. Read more about the reporting requirements for close company dividends, introduced in 2025.

Where the company is a close company, the director must disclose: 

• The name of the close company. 
• The company’s registered number. 
• The amount of dividend income received from that close company during the tax year (including nil where applicable). 
• The highest percentage shareholding held during the tax year.  

The requirements apply separately for each close company directorship. HMRC has added new fields within the Self Assessment 102 employment pages to capture this information. These disclosures provide HMRC with a much clearer picture of: 

• The relationship between directors and their companies. 
• Dividend extraction strategies. 
• Ownership structures. 
• Potential mismatches between company and personal tax returns. 

Practical implications for advisers and directors 

The new disclosures, combined with the current consultation on participator reporting, indicate a clear direction of travel. 

HMRC is seeking to improve its ability to connect: 

• Company accounts. 
• Corporation tax returns. 
• Dividend disclosures. 
• Director remuneration. 
• Loan account movements. 

Directors and their advisers should therefore ensure that: 

• Director’s loan accounts are reconciled regularly. 
• Dividends are properly documented. 
• Shareholding percentages can be evidenced. 
• Records distinguish clearly between salary, dividends and loans. 
• Overdrawn balances are identified at an early stage. 

Conclusion 

Directors’ loan accounts remain one of the most common areas of tax risk for owner-managed businesses. An overdrawn account can trigger corporation tax charges, benefit-in-kind liabilities and dividend tax consequences if not carefully managed. 

At the same time, HMRC is increasing transparency in the owner-managed business sector. The new 2025/26 self-assessment reporting requirements already require directors of close companies to disclose additional information regarding shareholdings and dividend income, while the first 2026 consultation signals HMRC’s interest in obtaining much more detailed information on transactions between close companies and their participators.  

While the rules for close companies discussed above apply only to UK resident companies currently, the second 2026 consultation includes proposals to extend the regime to non-UK resident closely held companies also, as well as other proposals impacting the loans to participators regime.

Let us know your views 

We respond to tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and other issues you raise with us are discussed. We welcome input from members to inform our work. Email us to share your insights and feedback.