An overdrawn director's loan account means the director owes the company money on the last day of its accounting period. It is the single position in this area that costs anything, and the cost is entirely avoidable if it is noticed in time. There are nine months and one day between the year end and the charge, and four realistic ways to use them.
What it costs if nothing is done
The company pays corporation tax at 33.75% of the outstanding balance. On a £40,000 overdrawn account that is £13,500, payable at the same time as the company's own corporation tax. It is reclaimable once the loan is permanently repaid, so in principle it is a deposit rather than a cost; in practice it is cash out of a company that was short of cash enough to be lending to its director, and the interest that runs on it is never recoverable.
The four ways out, in order of cost
Repay in cash from personal funds is the cheapest and clears everything. Declare a dividend to the extent of distributable reserves, taxed on the director at dividend rates, which for most owner-managers is materially cheaper than the s455 charge and permanent rather than reclaimable. Vote a bonus, which is deductible for the company but carries income tax and both classes of national insurance. Or write the loan off, which is the most expensive route and is covered on its own page here, because it is taxed as a distribution on the director and the national insurance treatment surprises people.
What does not work
Repaying just before the year end and taking the money out again just after does not work where at least £5,000 is involved: HMRC matches a repayment against a new loan of £5,000 or more made within 30 days either side, and the charge stands on the original. Nor does moving the balance to a spouse's loan account where the arrangement is really the same one. The anti-avoidance rules here are specific and were written against exactly these two moves.
Questions people ask about overdrawn directors loan account
What happens if a director's loan account is overdrawn at the year end?
The company reports it on form CT600A. If it is still outstanding nine months and one day later, the company pays corporation tax at 33.75% of the balance, reclaimable once the loan is permanently repaid.
Is it better to clear an overdrawn loan with a dividend?
For most owner-managed companies with distributable reserves, yes: dividend rates on the director are usually lower than the 33.75% the company would pay, and the dividend settles the position permanently rather than creating a reclaim.
Can I repay just before the year end and take it out again after?
Not where £5,000 or more is involved. A repayment matched by a new loan of £5,000 or more within 30 days either side is treated as though the repayment had not happened.