Figures relate to tax year 2025-26 (UK) · 2025 (US)
You took money out of your own company through the year, more than you put in, and your accountant booked it to a director loan account. It is an ordinary British arrangement and thousands of company owners run one.
Britain charges the company for leaving it outstanding, then refunds the charge when you repay. America is not interested in that mechanism at all. It wants to know whether the money was really a loan, and if it was not, it taxes you on it now.
Key takeaways
- Britain charges the company 33.75% on a loan account still overdrawn nine months after year end.
- That charge is refundable once you repay the company.
- America has no equivalent refundable charge and does not recognise one.
- An informal balance can be recharacterised as a dividend or as wages.
- A written agreement with interest and a repayment date changes the analysis.
- Interest below a statutory rate can create income for you on both sides.
What is a director loan account?
It is a running record of money moving between you and your company outside salary and dividends. Draw more than you have put in and the account is overdrawn, meaning you owe the company. According to HMRC guidance, the position at the company year end drives the tax treatment.
Most owner-managed companies run a loan account as a matter of course.
A loan account only becomes a problem when it stays overdrawn.
What does Britain charge?
The company pays a charge of 33.75% on any balance still outstanding nine months and a day after the year end. That money is not lost, because HMRC refunds it once you repay the loan, but it sits with them until then.
A balance over £10,000 also creates a benefit in kind unless you pay interest.
Both charges are familiar ground for a British accountant.
How does America see the same balance?
America asks whether the loan account records a genuine debt. Where the arrangement has no written terms, no interest, no repayment date and no real expectation of repayment, America can treat the withdrawals as a distribution of profits or as compensation for your work.
Either characterisation produces taxable income for you in the year you took the money.
There is no refund mechanism waiting at the other end.
A worked example
The figures below are illustrative and use round numbers to show the mechanics.
Tom runs a British company and is American. Over the year he drew £60,000 beyond his salary and dividends, leaving his loan account overdrawn by that amount at the year end.
Britain charges the company £20,250 nine months later, refundable when he repays. His British personal position is otherwise unchanged.
America looks at a balance with no agreement, no interest and no repayment date. It can treat the £60,000 as a dividend to him, taxable in the year he took it, with no British tax paid on it to credit.
The two treatments side by side
| Feature | United Kingdom | United States |
|---|---|---|
| Who is charged | The company | The director personally |
| Rate | 33.75% of the balance | Dividend or wage rates |
| Refundable on repayment | Yes | No |
| Benefit in kind | Above £10,000 without interest | Imputed interest rules can apply |
| Written agreement needed | Helpful | Close to essential |
| Credit for the other country | Not applicable | Usually none available |
What makes it look like a real loan?
Paperwork and behaviour together. A written agreement, a commercial interest rate, a stated repayment date, board approval, and actual repayments arriving on schedule all point towards a genuine debt rather than disguised profit extraction.
A loan account that grows every year and never reduces points the other way.
Nobody is fooled by an agreement drafted after the question is asked.
Does charging interest help?
It helps on both sides. Interest at a commercial rate removes the British benefit in kind and strengthens the argument that the arrangement is a real loan. America has its own minimum rates for loans between related parties.
Charge too little and America can impute interest anyway.
The imputed amount becomes income to the company and can become a deemed distribution to you.
What happens if the company writes it off?
Then both systems treat it as income. Britain generally taxes a written off loan to a participator as a distribution, and the company loses its deduction. America reaches a similar place, treating the release as income to you.
So writing it off solves the cash problem and creates a tax one.
Plan the clearance rather than reaching for the write off.
How do you clear a balance sensibly?
Usually with a dividend or a bonus voted before the deadline, which clears the account and produces a known tax cost. Repaying cash is cleanest where you have it, and a mix of the two is common.
Watch the rule that catches repayment followed by fresh borrowing.
Our guide to UK dividends on a US return covers the dividend route.
What is the bed and breakfasting rule?
It stops you repaying a loan just before the deadline and taking the same money back out afterwards. Where a repayment is matched by new borrowing within a set window, HMRC can treat the repayment as never having happened.
Thirty days is the usual window, with wider rules for larger balances.
Repay from genuinely separate funds and leave the balance down.
America looks at the same pattern as evidence the loan was never real.
Does it matter how many directors there are?
Each director has their own loan account, so the charges and the analysis run person by person. A British co-director with an overdrawn balance faces only the British side, while the American one faces both.
Company records should keep the two accounts entirely separate.
Pooling them makes both positions harder to defend.
What about a loan to a family member?
The rules reach further than you might expect. A loan to somebody connected to a shareholder can be treated as if it went to the shareholder, which pulls it back into the same charge.
So a loan to a spouse or an adult child is rarely a way around it.
Document who actually received the money and why.
How long can a balance stay outstanding?
Indefinitely in principle, provided you accept the charge and the paperwork supports a real debt. In practice a balance that never moves attracts attention from both sides and weakens the loan argument every year it survives.
Most advisers aim to clear it within a year or two.
A long-running balance needs a repayment schedule people actually follow.
How to review your position
- Find the loan account balance at the last company year end.
- Check whether a written agreement exists, with interest and a repayment date.
- Work out whether the nine month deadline has already passed.
- List the drawings and repayments across the year in date order.
- Convert the balance and movements to dollars at the relevant rates.
- Decide how to clear it before the next deadline.
- Put a proper agreement in place for any balance that will continue.
Does it affect your American filings?
It can touch several. A balance owed to your company is a transaction with a foreign corporation, and it feeds the annual reporting a US owner already files for that company.
Funding the company in the other direction has its own form.
Our guide to Form 926 and transfers to a UK company covers money going in.
What if the company owes you instead?
That is far simpler and much more common for a newer company. A loan account in credit means the company owes you, and repaying it returns your own money rather than producing income.
Interest the company pays you on that balance is taxable income.
Keep the two directions clearly separated in the accounts.
What does your accountant need from you?
The bank statements behind every withdrawal, a note of what each one was for, and any agreement you signed. Without that detail the figure in the accounts is a single number with no story attached to it.
Personal spending paid from the company card belongs here too.
Those small items add up faster than anyone expects.
Does the company size change anything?
Not the charge itself, which applies to close companies regardless of size. What changes is the scrutiny, because a larger company with proper board minutes and a treasury function looks very different from a one-person consultancy.
Formality is cheap and it is the main defence available.
Minute the decision at the time rather than reconstructing it later.
What happens when you sell the company?
An outstanding balance has to be settled before completion, and buyers will insist on it. That forces a clearance decision at the worst possible moment, often alongside a large gain and a higher rate band.
Clearing it early spreads the cost across quieter years.
Our guide to selling a UK business covers the exit itself.
Can you repay with assets instead of cash?
Sometimes, by transferring something you own to the company at a fair value. It works where the asset is genuinely useful to the business and the valuation holds up to scrutiny from either tax authority.
A transfer at an inflated value creates a different problem.
Get an independent valuation where the amounts are meaningful.
Does an American spouse change the analysis?
Only for their own position. A spouse who is also a shareholder has their own balance and their own American exposure, so a couple running one company can face the question twice over.
Joint withdrawals need splitting in the records.
Decide the split at the time rather than at the year end.
How does it interact with your salary?
Drawing a proper salary reduces the pressure on the account, because the money arrives through payroll with tax already deducted rather than building up as debt. Many owners take too little salary and then wonder where the balance came from.
Our guide to director fees across the US and UK covers the salary side.
Getting the mix right removes the problem rather than managing it.
Mistakes and penalties we see with a loan account
The first is running an informal loan account for years. It is the single strongest argument that no loan exists.
The second is clearing it with a dividend without checking the American cost first.
The third is repaying just before the deadline and redrawing afterwards. Both systems see that pattern.
The fourth is assuming a British accountant has considered the American side. They have no reason to.
How US UK Tax Accountants helps
We look at the loan account, the paperwork behind it and the pattern of drawings, then tell you whether America is likely to accept it as a loan. Where it will not, we price the alternatives before the deadline arrives.
We also put the agreement and interest terms in place properly. Our US federal return service covers the reporting.
If your company accounts show an overdrawn balance, get in touch. Fixing it before the year end costs a fraction of arguing about it afterwards.
Last reviewed 1 October 2026. This article is general information and not personal tax advice. Every company turns on its own facts, so take advice on yours before acting.
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Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
