A director's loan account written off means the company formally releases the director from the obligation to repay what they owe — but it is not a clean exit. HM Revenue & Customs treats the released amount as income, so the director usually faces an income tax bill, and the company may still face National Insurance and corporation tax consequences.
Many directors assume that if the company simply agrees not to chase the debt, the problem disappears. It doesn't. Writing off (or "releasing") an overdrawn director's loan account (DLA) triggers specific tax rules designed to stop directors extracting company money tax-free.
This article explains what actually happens — for you personally and for the company — before you consider a write-off as a way to deal with money you owe the business.
What "writing off" a director's loan account really means
An overdrawn DLA is simply money the director has taken out of the company that hasn't been repaid, and hasn't been paid as salary or dividend. Legally, it is a debt owed to the company.
"Writing off" or "releasing" the loan means the company's board formally agrees the director no longer has to repay it. This is a deliberate legal step, not something that happens by default or by ignoring the balance. It needs:
- A board resolution recording the decision to release the debt
- An accounting entry showing the loan has been written off
- Disclosure in the company's accounts
Once released, HMRC treats the amount as if the director had received it as income — because, in effect, they have.
The income tax charge for you personally
When a director's loan account is written off, the released amount is generally treated as a dividend for income tax purposes, even if no formal dividend was declared. This applies whether the company is solvent or heading towards insolvency.
The practical effect:
- The write-off is added to your other income for the tax year
- It is taxed at dividend rates, through your Self Assessment return
- There is no tax-free allowance specifically for this — it simply adds to your total dividend income
If the write-off pushes your total income into a higher tax band, the effective rate can be significantly higher than if the loan had simply been repaid. A write-off of directors loan account tax liability can therefore be a larger bill than many directors expect.
National Insurance implications
Separately from income tax, HMRC can also treat a written-off loan as earnings for National Insurance purposes where the director is also an employee of the company. This is a distinct rule from the dividend income tax treatment above, and both can apply to the same write-off.
Where this applies:
- The company may owe employer's Class 1 National Insurance on the amount written off
- The director may also face a personal National Insurance charge
This is one of the least understood parts of a directors loan write off national insurance position — directors often plan around the income tax charge and are then surprised by a separate NIC bill landing on the company.
What happens to the Section 455 charge
While a director's loan remains overdrawn and unpaid nine months after the company's year end, the company pays a Section 455 charge — a temporary corporation tax charge, currently 33.75% of the outstanding balance, under the Corporation Tax Act 2010.
Writing off the loan changes this picture:
- Once the loan is formally released, the Section 455 charge on that amount is no longer due going forward
- Any Section 455 tax the company has already paid on the balance becomes reclaimable, but only after the write-off is reported to HMRC and processed
- The release itself is what creates the new income tax and NIC charges described above
In short, a s455 write off doesn't cancel a tax liability — it exchanges one type of charge (Section 455, repayable) for another (income tax and possibly NIC, which is not repayable).
Why a liquidator won't simply write it off
If the company is insolvent, or heading that way, a director may hope that liquidation quietly wipes the debt. It doesn't work like that. An overdrawn director's loan account is an asset of the company, not the director's personal money to forgive.
A liquidator has a legal duty to realise assets for the benefit of creditors, so they will typically:
- Formally demand repayment of the outstanding loan
- Pursue the director for the balance if it isn't repaid
- Investigate the circumstances of the loan as part of their conduct review under the Insolvency Act 1986
Directors sometimes believe an overdrawn loan account is one of several situations where they can be personally liable for company debts. A liquidator chasing an unpaid DLA is a clear example of that.
Legitimate alternatives to a write-off
Because a write-off creates its own tax charges rather than avoiding them, it's worth understanding the realistic alternatives before assuming it's the simplest route:
- Repay the loan — in cash, over an agreed period, avoiding both the Section 455 charge (once cleared) and the write-off tax charges
- Offset against salary or dividend — declaring a dividend or bonus and using it to clear the balance, which is taxed under normal payroll or dividend rules rather than the write-off rules
- Formal repayment plan — agreeing a structured schedule with the company, properly documented
- Speak to a specialist before deciding — particularly if the company is struggling, since the right route depends on solvency, timing and the director's wider financial position
If repayment genuinely isn't possible, directors facing this situation may find it useful to read about what happens if you can't repay a director's loan account before assuming a write-off is the only option.
Frequently asked questions
Is a director's loan write-off tax-free?
No. HMRC treats the released amount as dividend income for tax purposes, so it is added to your income for the year and taxed accordingly. In some cases, National Insurance can also apply.
Can the company just forgive the loan?
The company can formally release the director from repayment through a board resolution, but this triggers income tax on the director and removes the temporary Section 455 charge, replacing it with a permanent one.
Does writing off a director's loan need a board resolution?
Yes. A release must be a formal, documented board decision, recorded in the minutes and reflected in the company's accounts — it isn't something that happens simply by not enforcing repayment.
Is the tax treatment different if the company is insolvent?
The income tax and National Insurance treatment of a write-off is broadly the same. However, an insolvent company's liquidator has a duty to pursue repayment of the loan for creditors, so a write-off agreed by the director alone is unlikely to be accepted.
Can I avoid Section 455 tax by writing off the loan just before the deadline?
Writing off the loan does stop the ongoing Section 455 charge, but it immediately creates an income tax charge (and possibly NIC) on the same amount, so it isn't a way to avoid tax on the balance altogether.
This article is general information, not legal, financial or insolvency advice, and every director's circumstances are different.
If you'd like to talk through your options, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.