Yes. A lawfully declared dividend can be credited to a director’s loan account instead of being paid out in cash, provided the articles allow that method and the director is free to draw on the credit. The date the entry is made is what counts: it fixes when the dividend is paid, which accounting period’s loan balance it reduces, and whether the company escapes section 455 tax on an overdrawn account.

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Is a credit to the loan account a valid way of paying a dividend?

Article 31(1) of the model articles for private companies lists the ways a dividend can be paid, and paragraph (d) allows “any other means of payment as the directors agree with the distribution recipient”. A book credit to the shareholder’s account with the company, agreed with that shareholder, fits within this. Companies with bespoke or older articles should check their own wording.

HMRC accepts the method. Its Company Taxation Manual at CTM15205 says a dividend is not paid until the money is received or “otherwise unreservedly placed at the shareholder’s disposal, for instance by being credited to a loan account on which the shareholder has power to draw”. The same page notes that in many small private companies the directors and shareholders are the same people and dividends are often credited to their accounts with the company.

The credit does not change what the payment is. It is still a dividend, so it must be covered by distributable profits under section 830 of the Companies Act 2006, paid at the same rate per share to every holder of the class, and documented with a voucher. GOV.UK guidance says each dividend voucher must show the date, the company name, the shareholders’ names and the amount. The general process is covered in how to pay dividends legally.

When does a dividend credited to the loan account count as paid?

That depends on whether it is a final or an interim dividend, a distinction explained on the interim and final dividends page.

  • Final dividend. CTM15205 says a final dividend is due and payable on the date of the shareholders’ resolution unless the resolution sets a later payment date. The loan account credit should be posted on that date.
  • Interim dividend. An interim dividend can be varied or cancelled until it is paid. CTM15205 says it is paid only when the money is placed unreservedly at the shareholder’s disposal as part of their current account with the company, which HMRC expects to be when the entries are made in the company’s books.

CTM15205 gives a warning that catches many small companies. If the directors resolve to pay an interim dividend before the year end but the bookkeeping entries are not made until the accounts are prepared after the year end, the dividend is treated as paid in the later accounting period, not the earlier one. HMRC’s Savings and Investment Manual at SAIM5040 says these rules on when a dividend is paid are also relevant to the shareholder receiving it.

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How does the timing affect section 455 tax on an overdrawn account?

Under section 455 of the Corporation Tax Act 2010, a close company that lends to a participator owes tax at a percentage of the loan equal to the dividend upper rate for the tax year in which the loan is made. Section 8(2) of the Income Tax Act 2007 sets the dividend upper rate at 35.75% for 2026 to 2027 onwards. Section 455(3) makes the tax due on the day after the end of nine months from the end of the accounting period. The wider rules are on the section 455 tax page.

Section 458 gives relief when the loan is repaid. CTM61610 says that where repayment happens within nine months of the period end, relief is available immediately and the section 455 tax need not be paid, noting that many companies clear loans with remuneration or dividends once the accounts show how much is owed. Where repayment comes later, relief is deferred until the due date for the accounting period in which the repayment is made.

CTM61600 adds two points that turn on timing. A repayment by book entry only takes effect on the date the entries are made. And for a dividend credited to the loan account, the deemed payment date in section 1168 of the Corporation Tax Act 2010 does not apply for section 458; until the dividend is actually paid, the debt remains outstanding.

Illustration only. A company’s year ends on 31 March. On that date a director shareholder’s loan account is overdrawn by £40,000 and the company has ample distributable profits.

What the company does Effect
Interim dividend of £40,000 resolved and credited on 20 March The account is clear at the year end; no section 455 charge arises on it.
Interim dividend resolved on 20 March but only posted in July when the accounts are prepared Treated as paid in July. The £40,000 was outstanding at the year end, but repayment within nine months means the section 455 tax need not be paid.
Final dividend declared and credited in the following February More than nine months after the year end, so section 455 tax is payable and relief waits until the due date for the later period.

GOV.UK guidance says that where a director’s loan is repaid within nine months of the end of the accounting period, form CT600A should still be used to show the amount owed at the end of the period.

Does the 30 day rule stop a dividend credit counting as a repayment?

Section 464ZA of the Corporation Tax Act 2010 targets repayments of £5,000 or more that are followed within 30 days by new borrowing of £5,000 or more in a later accounting period, and repayments made where the balance is £15,000 or more and arrangements exist to redraw. These are explained on the bed and breakfasting page.

Section 464ZA(6) switches the rules off for a repayment that itself gives rise to an income tax charge on the participator. CTM61642 gives a dividend credited to the loan account and taxed on the recipient as an example. The exclusion is narrow: HMRC says it does not cover a dividend paid out in cash and then paid back into the company, or a dividend from a different company.

What about a loan account that is already in credit?

Crediting a dividend to an account in credit simply increases what the company owes the director, who can draw the money later. Because the dividend is paid when it is placed at the shareholder’s disposal, it is income at the time of the credit, not when the cash is eventually withdrawn. Directors sometimes overlook this and are surprised that a dividend left in the company was still taxable that year. Dividend tax rates are set out on the dividend allowance and tax rates page.

The timing of credits also affects benefit in kind. GOV.UK guidance says that where a shareholder director owes the company more than £10,000 at any time in the year, the company must treat the loan as a benefit in kind. Crediting a dividend earlier in the year can keep the balance below that level for longer.

What if the dividend later proves unlawful?

A credit that clears an overdrawn account is only effective if the dividend was lawful. CTM15205 explains that where a shareholder knew or had reasonable grounds to believe a dividend was unlawful, it is void for tax, the shareholder holds it as constructive trustee, and for a close company the amount is treated as a loan under section 455. The Insolvency Service’s director information hub says unsupported dividends will usually be treated as a director’s loan and must be repaid. So a dividend credited to wipe out an overdrawn balance, when the company had no reserves, leaves the overdrawn balance in place. See how to put right an unlawful dividend.

What mistakes come up most often?

  • Posting at the audit and backdating the minute. ICAEW’s guide for directors warns that documents should not be backdated, as this may amount to fraud. Make the decision, minute it and post the credit at the same time.
  • Clearing the account without checking reserves. An unsupported dividend does not repay the loan.
  • Paying cash out and back in. This loses the section 464ZA(6) exclusion.
  • Crediting only one shareholder. Every holder of the class is entitled to the same rate, whether paid by cash or credit.
  • Forgetting the CT600A. A year end balance must still be reported even if it is cleared within nine months.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.