Tax on Overdrawn Director's Loan Accounts (ODLA) – What's changing?

From April 2026, the tax rules on overdrawn director's loan accounts are changing, with the section 455 tax charge increasing to 35.75% for loans made on or after 6 April 2026 for close companies. This is a two-percentage-point increase from the current rate of 33.75%, which applies to loans taken out on or after 6 April 2022 (loans predating this are charged at 32.5%).

Overdrawn director's loan accounts can present considerable complexity in the event of insolvency, with tax implications representing just one of several complicating factors. Given the upcoming changes, now is an opportune time to seek professional advice on overdrawn directors’ loan accounts in the context of insolvency.

What happens to an overdrawn directors’ loan account during insolvency?

Overdrawn directors’ loan accounts can be a real cause for concern, particularly in the event of insolvency. Company liquidation or administration does not erase an overdrawn directors’ loan by default; the loan continues to be classed as a company asset.

If a company enters liquidation, the loan must be personally repaid by the director which can put pressure on personal finances. If the funds cannot be raised (which would be used to pay creditors in the liquidation), the director risks personal bankruptcy or court action.

Can an overdrawn directors’ loan be written off?

A company may decide to write off a debt owed by a director as an overdrawn loan amount. If a company enters liquidation, the liquidator may pursue the director involved, regardless of whether the debt has been written off or not.

Liquidators have a legal duty to pursue every possible avenue that may lead to creditors being satisfied in full or in part. This can lead to individual directors being pursued for debts owed due to overdrawn directors’ loan accounts, and where these debts cannot be paid, company insolvency may directly lead to personal bankruptcy.

A common problem

Making use of a directors’ loan account is a common practice and often unproblematic, providing relevant records are retained and the loan is repaid. In practice, however, loan accounts are often underestimated as a potential source of financial difficulties.

What often happens is that a director takes money out of the company when the business performs well, however, struggles to make repayment when trading takes a turn for the worse. In our experience, between 75% and 80% of business insolvency cases involve overdrawn directors’ loan accounts.

Getting the best advice

The issue of overdrawn directors’ loan accounts, particularly in the context of company insolvency can be complicated by a variety of factors, not the least being the potential tax implications. Therefore, whatever the circumstances may be, it is crucial to encourage clients to seek professional guidance in a timely manner.

The sooner professional advice is sought, the sooner we can provide an understanding of the options available with regard to an overdrawn directors’ loan account and company insolvency. We offer a free and completely confidential consultation.

How can BTG Begbies Traynor support your clients?

To navigate an overdrawn directors’ loan throughout the company liquidation or administration process, we urge clients to seek professional guidance at the earliest opportunity to understand the available options. For more information on overdrawn directors’ loan accounts and repayment, read our comprehensive guide.