A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
Quick answer
An overdrawn director's loan account can usually be reduced or cleared by genuinely repaying the money, crediting a lawfully declared dividend, or in some cases using properly taxed salary or bonus. A loan may also be released or written off, but that normally creates a personal tax consequence and is not a tax-free solution.
At a glance
- The cleanest solution is a genuine cash repayment from personal funds — if settled before the section 455 deadline it can prevent the charge.
- A lawful dividend can be credited against the DLA if the company has sufficient distributable profits, but it must be properly declared.
- Salary or bonus can reduce a DLA but carries full PAYE and NIC costs — model it before assuming it is worth doing.
- A write-off is not tax-free: the amount released is normally taxable to the shareholder and may attract NIC.
- Anti-avoidance rules mean a repayment followed immediately by new borrowing of the same money may be ignored for section 455 purposes.
- A combination of routes is often better than one large transaction.
Before choosing a solution
First understand the position clearly. For a full introduction to what a director's loan account is and why it matters, read Director's Loan Accounts Explained. Before deciding on a clearance strategy, establish:
- the exact DLA balance;
- when each relevant amount arose;
- whether the borrower is a shareholder/participator;
- whether the balance exceeded £10,000 during the tax year;
- the company's accounting-period end;
- the section 455 payment deadline;
- available distributable reserves;
- whether a repayment would leave the director short of cash and likely to reborrow.
The best solution is fact-specific. A £30,000 overdrawn DLA with profitable reserves is a very different problem from a £30,000 DLA in a company with no distributable profits.
Option 1: repay the loan with personal funds
The cleanest solution is often a genuine cash repayment. If you owe the company £20,000 and transfer £20,000 from your own funds back to the company with no arrangement to take it straight back out, the DLA can be cleared. This can prevent or relieve section 455 depending on timing. However, do not borrow personally at an inappropriate rate merely to create the appearance of a repayment without considering the wider financial cost.
Option 2: use a lawful dividend
Where the director is a shareholder and the company has sufficient distributable profits, a dividend can often be credited against the DLA.
Example:
- DLA overdrawn: £30,000
- Sufficient distributable reserves: yes
- Dividend declared: £20,000
- New DLA balance: £10,000 overdrawn
The director has personal dividend tax on the £20,000 in the normal way. A dividend cannot be used if the company lacks sufficient distributable profits, and it must be properly declared — it cannot be backdated to make an earlier loan disappear.
Option 3: use salary or a bonus
Salary or bonus can potentially be credited against a DLA, but the amount is employment income and must be processed properly, with PAYE and National Insurance consequences. This route can be significantly more expensive than a dividend and needs modelling rather than assumption. For guidance on how salary and dividends compare, see The Most Tax-Efficient Director's Salary and Dividends for 2026/27.
Option 4: offset money the company genuinely owes you
Sometimes a DLA is overdrawn because not all genuine credits have been recorded. Examples can include business expenses paid personally, mileage claims, money previously lent to the company, and amounts due under properly documented transactions. Do not manufacture expenses — but do make sure genuine company liabilities to the director are actually recorded in the accounts.
Option 5: charge or pay interest
Interest does not clear the principal balance. Paying adequate interest can sometimes reduce an employment-related beneficial-loan charge (see What Happens If a Director's Loan Exceeds £10,000?). This is therefore a benefit-in-kind planning measure, not a repayment method.
Option 6: release or write off the loan
A company may be able to release the debt, but the amount normally becomes taxable to the shareholder/participator and National Insurance may also need consideration where the individual is an employee/director. A write-off should generally be treated as a deliberate taxable extraction method requiring advice — not a bookkeeping clean-up.
Which option avoids section 455?
That depends on when the balance is genuinely cleared. If the relevant loan is genuinely repaid or otherwise cleared before the section 455 payment point — normally nine months and one day after the accounting period — the company may avoid paying the section 455 cash charge on that amount. If it is cleared later, relief can generally still arise, but the company may wait for repayment of the section 455 tax.
Do not repay and immediately redraw
If you repay a material loan and then borrow substantially the same money back, HMRC's 30-day and arrangements rules can match the repayment to the new borrowing, negating the repayment. A valid plan needs to leave the loan genuinely reduced rather than cosmetically reduced for a few days. Full details of those anti-avoidance rules are in Section 455 Tax Explained.
A practical decision sequence
Step 1 — confirm the accounts
Get an up-to-date DLA ledger and check that personal and business items have been classified correctly.
Step 2 — check company profits and reserves
If a dividend is being considered, confirm sufficient distributable reserves with current management information.
Step 3 — check dates
Calculate the accounting-period end and section 455 payment date.
Step 4 — check the £10,000 beneficial-loan position
A balance can create an employment benefit before the section 455 deadline arrives.
Step 5 — model the clearance routes
Compare personal cash repayment, dividend, bonus/salary and any other genuine credits.
Step 6 — document the transaction
Record dividends, board/shareholder approvals and loan transactions properly.
Step 7 — monitor the balance afterwards
Do not clear a £40,000 DLA in September only to recreate it by December through uncontrolled personal drawings.
What we see in practice
The best answer is often a combination rather than one dramatic transaction. For example, a director may repay part in cash, use an affordable lawful dividend for part, and then change their monthly drawings so the balance does not immediately rebuild. The important part is to plan the DLA alongside the director's overall remuneration and cash requirements — ideally reviewing it during the year rather than only when a section 455 bill looms.
