Overdrawn director's loan: how to clear it

Why the clock matters

An overdrawn director's loan account isn't a problem in itself — it becomes one only if it's still overdrawn nine months and one day after the company's year end. Miss that and the company pays a section 455 charge of 33.75% on the balance. It's refundable once the loan is cleared, but the refund is slow and the cash is locked up meanwhile. So the whole game is clearing the balance — or planning around the charge — before the deadline.

Route one — repay in cash

The simplest route is to pay the money back from your own funds. No tax arises because you're just returning what you borrowed. If you have the personal cash, this is the cleanest option and leaves the company's position untouched. The catch is obvious: many directors are overdrawn precisely because the cash isn't there. If that's you, look at the other two routes, or at proper company funding rather than draining the account further.

Route two — declare a dividend

If the company has enough distributable profit, you can declare a dividend and offset it against the loan rather than paying it out in cash. The overdrawn balance shrinks by the dividend amount, and you pay dividend tax personally at your marginal rate. This works only where real retained profit exists — you can't dividend your way out of a loss-making company. It's the most common fix for owner-directors with profitable trading.

Route three — vote a bonus

The company can award you a salary bonus and set it against the loan. The balance clears, but the bonus is subject to income tax and National Insurance through PAYE — usually a heavier combined rate than dividends, so this tends to be a last resort or a fit where dividends aren't available. It does, however, count as a company cost and reduces corporation tax, which can tilt the maths in specific cases.

The trap: bed and breakfasting

Don't try to game the deadline by repaying the loan just before the nine-month mark and re-borrowing straight after. HMRC's bed and breakfasting rules catch exactly this: repay £5,000 or more and redraw a similar amount within 30 days, or where a redraw was intended, and the repayment is effectively ignored for section 455. The balance is treated as never cleared. The only reliable way through is a genuine repayment, a dividend against real profit, or a bonus.

The better long-term answer

A recurring overdrawn DLA is usually a symptom: the business doesn't generate enough cash to fund the owner's drawings, so the account fills the gap. Papering over that with dividends you can barely support, or bonuses that cost more in tax, only delays the reckoning. The durable fix is right-sizing drawings to what the company can afford and funding genuine working-capital needs properly. Credicorp lends to the company with no personal guarantee — model it first with the working capital calculator.