Director’s Loan Write-Off Rules
- Brian Pusser
- 23 hours ago
- 8 min read
Published 25 June 2026
If you run a company, your director’s loan account can easily become overdrawn.
This often happens when you take money from the company for personal use, but it has not been put through payroll or declared as a dividend.
For example, you may have used company money for:
Personal bills
Drawings from the business
Emergency cash withdrawals
Personal fuel or vehicle costs
Costs paid by the company that were not business expenses
If the company records show that you owe money back to the business, your director’s loan account is in the red.
One option is for the company to write off or waive the loan. This means the company agrees you no longer have to repay it.
But this can create a tax problem.
The big question is:
Will HMRC treat the write-off as a dividend, or will it treat it like wages and charge National Insurance?
Overdrawn Director’s Loan Account: Why It Matters
Many construction business owners focus on jobs, materials, labour, vans and cash flow.
The director’s loan account is often left until the year-end accounts are prepared.
That is when the accountant may say:
“You owe the company money.”
This can be a shock, especially if the cash has already been spent.
An overdrawn director’s loan account is not the same as profit. It means the company has paid money to you or for you, and that money has not been taxed properly yet.
If you do not deal with it, you may face:
Extra personal tax
Corporation Tax issues
Benefit in kind charges
Interest charges
National Insurance problems
HMRC questions
So, it is important to clear the balance properly.
Director’s Loan Account Write-Off: The Basic Rule
A director’s loan account write-off means the company cancels the debt.
In simple terms:
You owed the company money
The company decides you do not need to repay it
The loan is removed from the company’s books
But HMRC will then ask:
Why was the loan written off?
The answer matters.
If the write-off is connected to your role as an employee or director, HMRC may say it is like extra pay.
If it is connected to your role as a shareholder, it may be taxed like a dividend.
That difference is important because employment income can create National Insurance.
Director’s Loan Account Waiver for Employees, Shareholders and Directors
The tax treatment depends on who received the loan.
If You Are an Employee Only
If an employee has a loan written off, HMRC will usually treat it as employment income.
That means it is taxed like wages.
This can lead to:
Income Tax
Employee National Insurance
Employer National Insurance
If You Are a Shareholder Only
If a shareholder has a loan written off, HMRC normally treats it like a dividend.
That means the shareholder pays dividend tax.
There is usually no PAYE or employee/employer National Insurance.
If You Are a Director and Shareholder
This is where many construction company owners sit.
You are often:
A director
A shareholder
An employee
The person running the business day to day
This creates a grey area.
HMRC may try to say the loan was written off because you are a director or employee.
You may say it was written off because you are a shareholder.
The paperwork needs to support your position.
Director-Shareholder Loan Waiver: The Construction Owner Problem
Most small construction companies are owner-managed.
That means the same person often does everything:
Prices the jobs
Runs the site
Deals with customers
Pays suppliers
Manages labour
Owns the company
Acts as director
Because you wear many hats, HMRC may question why the loan was waived.
Was it because you worked in the business?
Or was it because you owned shares in the company?
This matters because:
A payment for work can be treated like wages.
A payment to a shareholder can be treated like a dividend.
If HMRC says it is wages, National Insurance may apply.
Director’s Loan Treated as Dividend
Where a loan is waived for a shareholder, the tax treatment can be similar to a dividend.
This means you may pay dividend tax on the amount written off.
Dividend tax rates are currently:
8.75% for basic rate taxpayers
33.75% for higher rate taxpayers
39.35% for additional rate taxpayers
You may also have a £500 dividend allowance, depending on your tax position.
Simple Example
Your company writes off a £20,000 director’s loan.
If the write-off is treated like a dividend, you pay dividend tax on the £20,000, after any available allowance.
You would usually report this on your Self Assessment tax return.
If the loan is written off in the 2026/27 tax year, the tax would usually be due by 31 January 2028.
This can help cash flow because the personal tax is not usually due immediately.
Director’s Loan Account Waiver and Corporation Tax
The company usually does not get Corporation Tax relief when it writes off a director’s loan.
This is because it is treated in a similar way to a dividend.
Dividends are paid out of company profits. They are not a business expense.
So, if your company writes off your loan, the company usually cannot reduce its taxable profit by that amount.
For example:
Loan written off: £20,000
Corporation Tax deduction: Usually £0
This is different from normal business costs such as materials, subcontractors, tools, plant hire or insurance.
A director’s loan write-off is not normally treated as a trading cost.
Loan Waiver National Insurance Trap
Here is the key trap.
Even if the loan write-off is taxed like a dividend, HMRC may still look at the National Insurance position separately.
HMRC may argue that the loan waiver is really earnings.
If HMRC wins that argument, the company and director may face Class 1 National Insurance.
That could mean:
Employee National Insurance for you
Employer National Insurance for the company
This can make the loan write-off much more expensive.
For a construction company already dealing with tight cash flow, CIS deductions, VAT, wages, materials and supplier bills, an unexpected NI bill can be a serious problem.
How to Avoid NI on a Director’s Loan Account Waiver
To reduce the risk of National Insurance, you need to show that the loan was waived because you are a shareholder, not because you are an employee or director.
The paperwork is very important.
Use a Shareholders’ Resolution
The waiver should be approved by the shareholders.
This is usually done through an ordinary shareholders’ resolution.
This helps show that the decision was made because of your position as a shareholder.
Avoid Only Using a Board Resolution
A board resolution may cause problems.
Why?
Because the board is made up of directors. If the directors approve the waiver, HMRC may argue that the write-off is linked to your role as a director.
That gives HMRC a stronger argument that the waiver is employment income.
So, if the aim is to treat the waiver as a shareholder matter, the company records should support that.
Stewart Fraser Ltd v HMRC and Director’s Loan NI
The case Stewart Fraser Ltd v HMRC is useful here.
It supports the idea that a loan waiver can avoid National Insurance if it is clearly made because of the person’s role as a shareholder, not as an employee.
The lesson is simple:
Get the paperwork right.
Your company records should show that the loan waiver was approved as a shareholder decision.
This can help if HMRC ever asks questions.
Clearing a Director’s Loan Account with Dividends
There may be a simpler option.
Instead of waiving the loan, the company may declare a dividend and use it to clear the director’s loan account.
This is often cleaner because HMRC understands how dividends work.
Simple Example
Your director’s loan account is overdrawn by £15,000.
The company declares a dividend of £15,000.
Instead of paying the cash to your personal bank account, the company credits the dividend to your director’s loan account.
The result:
The loan account is cleared
You pay dividend tax
The company does not physically pay out more cash
The paperwork is easier to understand
This is called a book entry.
No cash needs to move. The accounting records simply show the dividend clearing the debt.
Important Dividend Warning
A company can only pay dividends if it has enough profits available.
These are called distributable profits.
Before declaring a dividend, the company must check:
Has it made enough profit?
Are previous losses cleared?
Are all shareholders being treated correctly?
Is the dividend legal?
Has the dividend paperwork been prepared?
This matters in construction because cash in the bank does not always mean profit.
You may have cash because:
A customer paid upfront
VAT is sitting in the account
CIS has not yet been reclaimed
Supplier bills are unpaid
Subcontractors have not yet been paid
Retentions are still outstanding
So, do not declare a dividend just because the bank balance looks healthy.
Check the accounts first.
Director’s Loan Account Waiver vs Dividend
There are two main ways to clear the loan.
Option 1: Loan Waiver
The company writes off the debt.
This may be treated like a dividend for tax.
But there can be a National Insurance risk if the paperwork is poor.
Option 2: Dividend Credit
The company declares a dividend and credits it to the loan account.
This is often simpler.
But the company must have enough distributable profits.
For many construction business owners, the dividend route is often easier to explain and easier to evidence.
But it depends on the company’s profit position.
Common Mistakes Construction Business Owners Make
Many director’s loan problems happen because money is taken from the company without a clear plan.
Common mistakes include:
Taking personal drawings without checking profit
Paying personal bills from the company bank account
Thinking company cash is personal money
Forgetting VAT, CIS and Corporation Tax
Not declaring dividends properly
Not preparing dividend vouchers
Leaving the loan account overdrawn for too long
Writing off the loan without proper paperwork
Using a board resolution instead of a shareholder resolution
Ignoring National Insurance
These mistakes are common, but they can be expensive.
A proper plan can prevent problems before they build up.
Director’s Loan Account Waiver Checklist
Before writing off or clearing an overdrawn director’s loan account, ask these questions:
How much do I owe the company?
How long has the loan account been overdrawn?
Am I a shareholder, director, employee, or all three?
Was the money taken as drawings, wages, dividends or expenses?
Does the company have enough profit to pay a dividend?
Would a dividend credit be simpler than a waiver?
If using a waiver, has a shareholders’ resolution been prepared?
Could HMRC argue the waiver is employment income?
Is there a Class 1 National Insurance risk?
Has the tax been reported correctly on my Self Assessment return?
If you are unsure on any of these points, get advice before the company writes off the loan.
Director’s Loan Account Waiver Summary
If your director’s loan account is in the red, do not ignore it.
A company can sometimes waive or write off the debt, but it must be handled carefully.
The main points are:
A director’s loan account waiver can clear an overdrawn balance
If you are a shareholder, the write-off may be taxed like a dividend
The company usually does not get Corporation Tax relief
HMRC may still argue that National Insurance applies
To reduce the NI risk, the waiver should be approved by shareholders
The case Stewart Fraser Ltd v HMRC may support this approach
A dividend credit may be simpler if the company has enough profits
For construction business owners, this is really about control.
You need to know what is profit, what is tax money, what is company cash, and what is money you can safely take personally.
Get More Help From B R Pusser & Co Ltd
Understanding director’s loan account waiver rules can make a significant difference to your tax position, National Insurance exposure and company records.
By structuring the loan write-off correctly, using the right shareholder approvals, understanding the dividend tax treatment and avoiding common NI mistakes, you can reduce the risk of an unexpected HMRC challenge.
If you are unsure how to clear an overdrawn director’s loan account, or you are considering a loan waiver and want to avoid unnecessary National Insurance charges, B R Pusser & Co Ltd is here to help.
We provide tailored tax advice and planning support for owner-managed businesses, construction businesses and trades businesses, helping you deal with director’s loan accounts correctly while keeping your business tax-efficient.
Contact us today to discuss your director’s loan account and build a tax-efficient plan for clearing the balance.
