Overdrawn Directors’ Loan Accounts and Repayment
An overdrawn director’s loan account occurs when you withdraw more money from your limited company than you have put in (not including salary, declared dividends, or legitimate business expenses). Legally, this money belongs to the company and you are required to pay it back.
As a director, it is important to understand how director's loan accounts work, and why they can cause problems for directors and their creditors particularly if insolvency threatens.
“In most of the insolvency cases I deal with, the overdrawn director's loan account is the issue that catches directors most off guard. They’ve been withdrawing money steadily during good years and genuinely don’t realise the running total until we sit down together.”
- Julie Palmer, Partner, BTG Begbies Traynor
What is a director's loan account?
A director’s loan account is essentially a means through which a director can take money out of their company which isn’t classed as dividends or income.
Where no money is removed from a company, a director’s loan account will be at a zero level. Conversely, the director's loan account will be in credit when a director puts more of their own money into the company than they take out.
What happens when a director's loan account is overdrawn?
An overdrawn director’s loan account describes a situation in which a director has taken more money out of a company than they have put in, not including dividends or salaries. This overdrawn balance is classed as an asset of the company.
Having an overdrawn director's loan account isn’t necessarily a problem for a company or a cause for concern for directors, as long as records are kept of all relevant transfers and the amounts owed are settled within nine months of the company’s financial year end.
However, where these amounts are not repaid and the sums involved are in excess of £10,000, HMRC may take the view that a director has effectively been taking money out of their company as income, and taxes become payable.
The section 455 tax charge is a corporation tax charge that applies to overdrawn director's loan accounts that are not repaid within a fixed period. The tax charge applies if your director's loan account is overdrawn and the outstanding loan is not repaid within nine months and one day after the end of the company's accounting period.
The tax rules on overdrawn director's loan accounts changed in April 2026. The section 455 tax charge increased to 35.75% for loans made on or after 6 April 2026 for close companies. This is a two-percentage-point increase from the previous rate (33.75%) which applies to loans taken out on or after 6 April 2022 (loans predating this are charged at 32.5%).
“Since the April 2026 increase in the section 455 charge, we’ve seen a noticeable uptick in directors contacting us specifically about director's loan account tax exposure. The jump to 35.75% has made this a much more urgent issue for owner-managed businesses than it was previously.”
- Julie Palmer, Partner, BTG Begbies Traynor
What happens to a director's loan account during insolvency?
When a company becomes insolvent and enters into a formal insolvency process, the appointed insolvency practitioners have a legal duty to recover as much money for the company's creditors as possible.
As an overdrawn director’s loan account is classed as an asset of the company, repayment of this will be pursued by the appointed insolvency practitioner.
In reality, this means the director is liable to pay back the overdrawn director's loan to the company so that this can be used to repay creditors. It goes without saying that being asked to bring their director's loan account up to date can put huge pressure on the personal finances of directors whose business is being liquidated.
Director's loan accounts are often misunderstood and directors often only understand the pitfalls once their company becomes insolvent.
This scenario is so common in fact, of that the directors we’ve spoken to in the last six months, well over half had no plan in place for repaying their overdrawn director's loan account before they contacted us. In many cases, directors tell us they weren’t fully aware of the running balance until their accountant flagged it or the company began to struggle.
What we typically see
A director of a construction firm came to us after withdrawing approximately £45,000 from their director's loan account over three years during a period of strong trading. When contracts dried up and the company became insolvent, he faced the prospect of having to repay the full amount as part of the liquidation process. By working through the records together, we identified legitimate business expenses within that figure, including fuel costs, site visits, and client entertainment, which reduced the claimable amount significantly. We were also able to come to a mutually-agreeable repayment arrangement, which allowed the director to pay towards the overdrawn director's loan account in a way which was both affordable and sustainable.
Can overdrawn director loan accounts be written off during liquidation?
During liquidation, the appointed insolvency practitioner must maximise returns for creditors. This means a director with an overdrawn director's loan account will be asked to repay the balance back to the company.
If a director is unable to do this, a compromise may be able to be reached when it comes to partial repayment. In many cases the insolvency practitioner will not formally write off the remaining balance, and instead leave the option open to pursue the director for repayment should they later come into a windfall. If an overdrawn director's loan is formally written off, tax will be payable to HMRC via a Income Tax (Trading and Other Income) Act 2005 S415 charge being levied on the director.
A recent landmark case, Quillan v HMRC (2025), has huge implications for how overdrawn director's loans which cannot be repaid are treated during formal insolvency proceedings.
During this case it was determined that although an overdrawn director's account was only partially repaid during the company's liquidation process, no formal agreement had been made to write off the remaining debt. Therefore the S415 Income Tax charge HMRC were seeking to impose was not granted.
The Quillan v HMRC (2025) tribunal ruling clarifies that an overdrawn director’s loan is not automatically 'written off' for income tax purposes simply because a company enters liquidation and full recovery appears unlikely.
Can an overdrawn directors loan account lead to wrongful trading claims?
If a director continues to withdraw money from the company through their loan account after the point at which they knew, or ought to have known, that their company was insolvent, this can be treated as wrongful trading or misfeasance by the liquidator.
In serious cases, this could lead to the director being held personally liable for a contribution to the company’s debts beyond just the overdrawn directors loan account balance. It can also result in director disqualification proceedings, which would prevent the individual from acting as a director for up to 15 years.
This is one of the reasons we always advise directors to seek professional advice as early as possible. If you’re aware your company is struggling and your loan account is overdrawn, taking action now, rather than continuing to withdraw, can significantly reduce your personal exposure.
What if I can’t afford to repay my overdrawn directors’ loan account?
If the overdrawn amount is more than you can afford to repay in full, there are several options that may be available to you:
- Negotiate a repayment plan — In many cases, the liquidator will accept a reasonable repayment arrangement rather than pursuing the full amount through the courts. This is often the most practical outcome for both sides.
- Reducing the amount — If you can demonstrate that some of the withdrawals were legitimate business expenses (such as travel, client meetings, equipment purchases), these can be offset against the overdrawn balance. Records will be needed to support each claim.
- Personal insolvency options — In cases where the overdrawn amount is substantial and the director has no realistic means of repaying, options such as an Individual Voluntary Arrangement (IVA) or personal bankruptcy may need to be considered.
Whatever your circumstances, the earlier you speak to a licensed insolvency practitioner, the more options are likely to be available to you.
How to protect yourself if your directors' loan account is overdrawn
- Check the exact balance with your accountant. Many of the directors we speak to don’t know the current figure, and in our experience, it’s almost always higher than they expect.
- Gather records of any legitimate business expenses. Money withdrawn for genuine business purposes, such as client entertainment, travel, equipment, may reduce the claimable amount.
- Stop withdrawing money if the company is struggling. Continuing to take out of your director's loan account while the company is in financial difficulty can increase your personal exposure, including the risk of wrongful trading claims.
- Speak to a licensed insolvency practitioner early. The earlier you get advice, the more options are available, making it more likely for a workable solution to be found.
How BTG Begbies Traynor can help
The issue of overdrawn director loan accounts, particularly in the context of a company becoming insolvent can be extremely complex.
Whatever your circumstances, getting timely advice is crucial. An overdrawn directors’ loan account doesn’t have to lead to personal bankruptcy, but the earlier you speak to someone, the more we can do to help you manage the situation. Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation. We speak to directors in your position every day, and we’ll give you an honest, clear picture of where you stand.
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