Last updated: 14 October 2026
Can two directors’ loan accounts be merged for tax purposes?
No. Each director has a separate loan account, and HMRC looks at each one on its own. If one director owes the company money and the other is owed money by the company, you can’t net them off to avoid the tax charge on the overdrawn account. The company may still owe the 33.75% section 455 charge on the overdrawn balance, and the director may have a benefit in kind if the loan exceeded £10,000, even though the other director is in credit.
Why the accounts stay separate
A director’s loan account records money between the company and that individual. A credit balance belongs to the director who lent the money. Using it to clear another director’s debt would be a payment from one individual to another, so it needs to be documented properly. It’s not just an adjustment between accounts.
How you can clear an overdrawn account
| Method | Tax effect |
| Repay in cash within 9 months and 1 day of the year end | No section 455 charge |
| Declare a dividend to the overdrawn director | Income tax at dividend rates; needs distributable reserves |
| Pay a bonus through payroll | Income tax and NICs; deductible for the company |
| Credit director A’s balance owed to director B, by written agreement | Treated as director A lending to director B; then B repays the company |
| Write off the loan | Taxed as a distribution on the director; Class 1 NIC may apply |
Example
Directors Amir and Beth run a company with a 31 March year end. At 31 March 2027, Amir owes the company £20,000 and the company owes Beth £20,000. The company can’t treat the two balances as cancelled out. If Amir’s £20,000 isn’t repaid by 1 January 2028, the company pays section 455 tax of £6,750, repayable once the loan is repaid. Amir also has a benefit in kind on interest at the official rate of 3.75% (around £750 a year if the full balance was outstanding), unless he pays at least that rate.
Joint accounts and spouses
Even if the two directors are married, HMRC still treats their loan accounts separately. For the £10,000 benefit limit, loans from the company to relatives of a director can also be counted together with the director’s own loans.
Bed and breakfasting rules
If you repay a loan and take out a new one within 30 days, or arrange it in advance, the repayment may be ignored for section 455 purposes, where the loan is £5,000 or more.
Keeping clean records
Record each director’s transactions separately, with dates and descriptions. Board minutes should approve any loans over £10,000, and any transfer between directors should be set out in writing and signed by both.
Frequently asked questions
Can a credit balance earn interest?
Yes; the company can pay interest, deducting 20% tax.
Does the overdrawn account appear on the accounts?
Yes, in the notes to the financial statements.
Can we report a single combined balance?
No, each director’s balance is reported separately.
Is section 455 tax a permanent cost?
No, it’s refunded after the loan is repaid, though with a delay.
Related: the director’s loan tax charge, whether an employee loan must be reported and cheap loans to employees.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with directors’ loan accounts. See our limited company accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
