What Is a Director’s Loan Account and How Does It Work

When you run a limited company, you and your business are legally separate entities. However, it is common for money to move between you and the company throughout the year. These transactions are recorded through a Director’s Loan Account (DLA). Understanding how a Director’s Loan Account works is essential for staying compliant with HMRC rules and avoiding unexpected tax charges. This article explains what a DLA is, how it operates, and the tax consequences of borrowing from or lending to your company.

What is a Director’s Loan Account

A Director’s Loan Account is a record of all financial transactions between a company and its directors that are not salary, dividends, or expense reimbursements.

It acts as a running balance showing how much the company owes the director or how much the director owes the company.

In simple terms:

  • If you lend money to your company, the company owes you, and your loan account is in credit.

  • If you take money out of the company, beyond your salary and dividends, you owe the company, and your loan account is overdrawn.

Your accountant records these transactions in the company’s books so they can be properly reported in the annual accounts and Corporation Tax return.

Common transactions recorded in a Director’s Loan Account

A DLA keeps track of all money movements between you and your company. Common examples include:

  • Money you lend to the business to help with start-up costs or cash flow.

  • Personal funds used to pay company bills or expenses.

  • Money you withdraw from the company that is not part of your salary or dividends.

  • Company payments for personal expenses, such as personal bills or purchases.

  • Repayments made by the company for loans or expenses you covered personally.

Each of these transactions changes the balance of the loan account.

How a Director’s Loan Account works

When your account is in credit

If you put personal money into the company, your loan account is in credit. The company owes you that amount, and you can withdraw it at any time without any tax implications.

In some cases, you can also charge the company interest on the loan, which is treated as an allowable business expense for the company but taxable income for you personally.

When your account is overdrawn

If you take money out of the company that is not salary, dividends, or legitimate business expenses, your loan account becomes overdrawn.

An overdrawn DLA means you owe the company money. HMRC treats this as a loan from the company to you, which has specific tax consequences depending on how and when it is repaid.

Tax rules for overdrawn Director’s Loan Accounts

Corporation Tax (Section 455 charge)

If your Director’s Loan Account remains overdrawn at the end of your company’s financial year and is not repaid within nine months and one day, the company must pay additional Corporation Tax under Section 455 of the Corporation Tax Act 2010.

The current Section 455 tax rate is 33.75% of the outstanding loan balance.

This tax is paid to HMRC along with the company’s normal Corporation Tax. The good news is that once the loan is repaid, the company can reclaim the Section 455 tax, although the refund may take some time.

Benefit in kind (personal tax)

If the total loan amount exceeds £10,000 at any point during the year and no interest is charged (or the interest rate is below HMRC’s official rate), it is classed as a benefit in kind.

This means:

  • You must pay Income Tax on the benefit.

  • The company must pay Class 1A National Insurance contributions on the value of the benefit.

To avoid this, you can charge interest on the loan at HMRC’s official rate, but this must be properly documented.

Dividend and salary tax implications

Some directors repay their loan using future dividends or salaries. This is allowed but must be recorded accurately and declared through payroll or on the company’s dividend records.

Example of a Director’s Loan Account

Imagine you lend your company £5,000 to help cover start-up costs. The company owes you this money, so your DLA is in credit by £5,000.

Later, you withdraw £8,000 from the company that is not salary or dividends. Now your DLA is overdrawn by £3,000 (£8,000 withdrawn minus £5,000 you lent).

If you do not repay this £3,000 within nine months of the company’s year-end, your company will owe Section 455 Corporation Tax of 33.75% of £3,000, which equals £1,012.50.

Once you repay the £3,000, the company can reclaim that £1,012.50 from HMRC.

Repaying an overdrawn loan

There are several ways to clear an overdrawn DLA:

  • Repay the money directly to the company before the nine-month deadline.

  • Offset against dividends or salary that you are due to receive.

  • Write off the loan if the company decides not to reclaim it, although this is treated as personal income and taxed accordingly.

Keeping accurate records of repayments is crucial to avoid penalties or double taxation.

What happens if you do not repay the loan

If you fail to repay the loan within nine months of the year-end, your company must pay the Section 455 charge.

Additionally, if the company goes into liquidation or is unable to recover the loan, HMRC may consider the unpaid amount as income and demand that you pay personal Income Tax on it.

In serious cases, repeated or large overdrawn balances can attract HMRC scrutiny, as it may appear that directors are using company funds for personal gain without declaring the income properly.

Best practices for managing a Director’s Loan Account

  • Keep detailed records: Track all transactions between you and the company.

  • Use accounting software: Tools like Xero or QuickBooks help you maintain an up-to-date DLA.

  • Plan withdrawals: Avoid taking money out unless profits or dividends can cover it.

  • Monitor repayment deadlines: Ensure any overdrawn balance is cleared within nine months.

  • Consult your accountant: They can help you calculate any tax due and keep your records compliant.

Regularly reviewing your DLA helps avoid unexpected tax bills and maintains transparency with HMRC.

How an accountant can help

An accountant plays a key role in managing your Director’s Loan Account. They can:

  • Reconcile your transactions to ensure accuracy.

  • Calculate potential Section 455 or benefit in kind tax charges.

  • Advise on the most tax-efficient way to repay or draw funds.

  • Submit the necessary disclosures in your company accounts and tax returns.

  • Prevent compliance issues that could trigger HMRC investigations.

Their expertise ensures your DLA is handled correctly and your tax liabilities are minimised.

Final thoughts

A Director’s Loan Account is a vital part of managing finances within a limited company. It tracks money flowing between you and your business and ensures these transactions are reported correctly for tax purposes.

While borrowing from your company can provide short-term flexibility, it must be managed carefully to avoid costly tax charges. Keeping clear records, repaying loans on time, and seeking advice from an accountant will help you stay compliant and make the most of your company’s finances responsibly.