What Is a Director’s Loan Account and How Do I Avoid Problems?

A Director’s Loan Account tracks money moving between you and your company. Learn how it works, what tax rules apply, and how to manage it properly to avoid HMRC issues.

Introduction

If you run a limited company, you may have heard the term Director’s Loan Account (DLA) mentioned by your accountant. It is a key part of how directors take money from their business outside of salary and dividends. However, it is also one of the most misunderstood areas of company finance.

A Director’s Loan Account can be a useful way to manage cash flow between you and your company, but if handled incorrectly, it can lead to tax charges and penalties from HMRC. This article explains what a Director’s Loan Account is, how it works, and how to avoid common mistakes that cause problems for business owners.

What Is a Director’s Loan Account?

A Director’s Loan Account is a record in your company’s accounts that tracks all money you personally take out of or put into the business. It is not the same as your salary or dividends. Instead, it records transactions between you and the company that are personal rather than business-related.

For example:

  • If you lend your company money to help with start-up costs, this is recorded as a credit (the company owes you).

  • If you take money out of the company that is not salary or dividends, this is recorded as a debit (you owe the company).

The balance of your Director’s Loan Account shows whether the company owes you or you owe the company.

When the Company Owes You Money

If you have used personal funds to pay for company expenses or lent money to the business, your Director’s Loan Account will be in credit. This means the company owes you money.

You can withdraw this money tax-free at any time, as long as there are enough company funds available to do so. It is effectively your money being repaid.

When You Owe the Company Money

If you have taken more money from the company than you have put in, your Director’s Loan Account becomes overdrawn. This means you owe the company.

Overdrawn loan accounts are common in small businesses, especially when directors take money informally instead of paying themselves through payroll or dividends. However, this is where problems can arise. HMRC has strict rules about how and when these loans must be repaid, and failing to follow them can lead to extra tax.

Tax Implications of an Overdrawn Director’s Loan Account

If your loan is not repaid within nine months of the company’s year-end, your company must pay a tax charge under Section 455 of the Corporation Tax Act 2010.

The charge is 33.75% of the outstanding loan balance. Although this tax can be reclaimed once the loan is repaid, it ties up cash and adds unnecessary administration.

In addition, if the loan exceeds £10,000 and you do not pay interest on it, HMRC treats it as a benefit in kind, which means:

  • You will pay personal tax on the benefit.

  • The company will pay Class 1A National Insurance on the same amount.

HMRC may also view persistent overdrawn loan accounts as disguised remuneration, meaning you are effectively taking income without paying the correct taxes.

How to Avoid Problems with Your Director’s Loan Account

  1. Keep accurate records
    Record every personal transaction between you and the company in real time. Use bookkeeping software or ask your accountant to monitor the account regularly.

  2. Use proper methods to take money
    Pay yourself through salary or dividends rather than casual withdrawals. Dividends must come from profits, and salaries must be processed through payroll.

  3. Repay loans within nine months
    If you borrow money from your company, repay it within nine months of the financial year-end to avoid the Section 455 tax charge.

  4. Avoid large or frequent loans
    Treat your company’s funds separately from your own. Taking regular small loans can attract HMRC attention, especially if the balance remains overdrawn.

  5. Declare and pay interest if appropriate
    If the loan is over £10,000, either repay it quickly or charge a commercial rate of interest to avoid it being treated as a benefit in kind.

  6. Take advice before writing off a loan
    Writing off a loan has tax consequences for both you and the company. Always check with your accountant before making this decision.

Example Scenario

Imagine Sarah, the sole director of a small design agency. During the year, she withdraws £20,000 from the company to cover personal expenses, assuming it will be balanced out later by dividends. However, at year-end, the company has not made enough profit to declare dividends, leaving her Director’s Loan Account overdrawn by £20,000.

If Sarah does not repay the amount within nine months, the company will have to pay £6,750 in temporary Corporation Tax under Section 455 (33.75% of £20,000). She can reclaim it once the loan is cleared, but it may take time and add unnecessary paperwork.

Had Sarah planned her drawings through a proper salary and dividend structure, she could have avoided this issue entirely.

Writing Off or Clearing a Director’s Loan

There are three main ways to clear an overdrawn Director’s Loan Account:

  • Repayment: You transfer the funds back into the company account.

  • Dividend declaration: If the company has sufficient profit, you can declare a dividend to offset the balance.

  • Salary payment: You can take additional salary through payroll, though this may create PAYE and National Insurance obligations.

Whichever method you choose, your accountant should document the transaction correctly in the company’s books.

How Your Accountant Can Help

A good accountant will help you manage your Director’s Loan Account proactively. They can:

  • Monitor your balance monthly and warn you of potential overdrawn positions.

  • Advise on the most tax-efficient way to take money from the company.

  • Prepare dividend vouchers and minutes to keep your records compliant.

  • Calculate Section 455 charges if applicable and help reclaim them later.

By keeping track of the account throughout the year, your accountant can ensure you avoid unnecessary tax charges or compliance risks.

Common Mistakes to Avoid

  • Treating the company’s bank account like a personal one

  • Forgetting to record small personal withdrawals or expenses

  • Assuming dividends can be declared after the year-end to fix an overdrawn loan

  • Ignoring the nine-month repayment deadline

  • Not taking advice before offsetting loans with dividends or salary

These mistakes can easily lead to tax complications or HMRC scrutiny.

Conclusion

A Director’s Loan Account is a useful tool for managing transactions between you and your company, but it must be handled carefully. Keeping accurate records, repaying loans on time, and taking professional advice will help you avoid penalties and tax problems.

Always remember that company money belongs to the business, not the director. Treating it that way protects your limited liability status and keeps HMRC satisfied.

If you are unsure how to manage your Director’s Loan Account or whether it is overdrawn, speak to your accountant as soon as possible. They can help you stay compliant and plan your drawings in a tax-efficient way.