A dividend can only be paid out of profit your company actually has after tax. Take more than that, and the law treats the extra as a loan from the company to you — a director's loan. Left owing more than nine months and one day after your year-end, it triggers a tax charge of 35.75% (called the s455 charge), which you get back once you repay the loan.
Here's how the trap works and how to stay clear of it.
When a dividend becomes a loan
Dividends come out of retained profit — what's left after corporation tax. If you draw money when that profit isn't there, it isn't a dividend, even if you called it one. HMRC treats it as the company lending you money, and it sits in your director's loan account until you repay it or clear it properly.
The £10,000 line
Kept under £10,000 across the whole year, a director's loan doesn't create a taxable benefit-in-kind to worry about. Go over £10,000 and there are extra consequences to handle, so it's a threshold worth watching.
The 35.75% s455 charge
The bigger cost is the s455 charge. If the loan is still owed nine months and one day after your company's year-end — the same date your corporation tax is due — the company pays 35.75% of the outstanding balance to HMRC.
It's refundable: you get it back once you repay the loan. But until then it's your cash, locked up with HMRC in the meantime, so it's a real cost even though you don't lose it permanently.
How to stay clear
Only take dividends when the profit is there to support them, keep an eye on your director's loan account through the year, and clear any balance before the nine-months-and-one-day deadline. If you need to take money out and the profit isn't there yet, it's worth planning the timing rather than finding out at your year-end.
Frequently asked questions
What is a director's loan? Money you take out of your company that isn't salary, a legitimate dividend, or a repayment of money you put in. If you draw more than the company's after-tax profit, the excess is a loan from the company to you.
What is the s455 charge? A tax charge of 35.75% on a director's loan still outstanding nine months and one day after the company's year-end. It's refundable once the loan is repaid.
How much can I borrow from my company tax-free? Kept under £10,000 across the year, a director's loan doesn't create a taxable benefit-in-kind. The s455 charge still applies if it's left unpaid past the deadline.
Work with us
Timing how you take money out of your company — and keeping the loan account clean — is exactly the kind of thing we plan with founders. Book a call with Carr Accounting Studio.
General information, not advice. UK figures 2026/27 — they change, and your situation may differ. Written by David Carr, chartered accountant and founder of Carr Accounting Studio.