How directors' loan accounts work (and how to stay on the right side of HMRC)

Every limited company in the UK has a directors' loan account (DLA) for each director, whether or not the director knows it exists. It is simply the running total of money the company owes the director, or the director owes the company. Understood properly, it is one of the most useful tools in a company owner's kit. Misunderstood, it is one of the fastest routes to an unexpected tax bill.

This guide explains what a DLA is, how each side of it is taxed, and the specific rules that catch directors out most often.

What a DLA actually is

A directors' loan account is a ledger account in the company's books that records every transaction between the company and the director that is not salary, dividend, expense reimbursement, or repayment of an existing balance.

Examples that increase the balance owed to the director (DLA in credit):

• Director lends personal money to the company
• Director pays for a company expense on a personal card
• Salary or dividend declared but not yet paid

Examples that increase the balance owed by the director (DLA overdrawn):

• Director withdraws cash from the company that is not salary or dividend
• Company pays a personal expense on behalf of the director
• Director takes a deposit from the company for personal use

At any moment in time, the DLA is either in credit (company owes director), overdrawn (director owes company), or zero.

When the DLA is in credit

A DLA in credit is straightforward and safe. The director can draw down the balance at any time, tax-free, because it is simply a repayment of money already lent to the company. No Income Tax. No National Insurance. No Corporation Tax consequences.

The company can also pay the director interest on a credit balance, which is deductible against Corporation Tax and gives the director access to the £1,000 personal savings allowance (£500 for higher-rate taxpayers). This is frequently overlooked.

When the DLA is overdrawn: the two taxes to worry about

An overdrawn DLA is a loan from the company to the director. HMRC treats it with suspicion because it is an obvious route for owner-managers to extract value without paying Income Tax. Two separate tax charges apply.

1. Section 455 tax (the corporate charge)

If the DLA is overdrawn at the company's year end and the overdrawn balance is not repaid within 9 months and 1 day of the year end, the company must pay Section 455 tax at 33.75% of the outstanding amount.

Key points:

• The 33.75% is paid by the company, not the director
• It is paid alongside the Corporation Tax return
• It is refundable, but only in the accounting period in which the loan is repaid, and only after 9 months and 1 day of that period's year end. Cash flow impact is real and lasting.
• "Bed and breakfasting", repaying the loan just before year end and redrawing it shortly after, is caught by anti-avoidance rules. HMRC looks for genuine repayments, not paper exercises.

2. Benefit in kind (the personal charge)

If the overdrawn balance exceeds £10,000 at any point in the tax year, and the company does not charge the director interest at HMRC's official rate (3.75% from 6 April 2025, check gov.uk for the current rate), the loan is treated as a beneficial loan.

The director is taxed on the implied interest as a benefit in kind, reportable on a P11D. The company pays Class 1A National Insurance at 15% on the same amount.

Below £10,000 the beneficial loan rules do not bite. Above it, they do, and the threshold applies to the full balance, not the excess.

How most directors accidentally end up overdrawn

The DLA goes overdrawn almost entirely by accident, usually in one of three ways.

Dividend mechanics done wrong. Director takes monthly "drawings" from the company, intending to declare dividends to cover them at year end. If profits turn out to be lower than expected, the dividends cannot legally be declared, and the drawings become an overdrawn loan.

Personal expenses on the company card. Holiday, personal subscription, weekend shopping. Each one posts to the DLA until corrected or coded to benefits in kind.

Timing mismatch. Director withdraws £40,000 in November, intends to declare a dividend in the following month, but the bookkeeping lags. The year end comes, the dividend has not been formally declared, and the balance is treated as a loan.

How to use a DLA legitimately

Done properly, a director's loan is a useful short-term tool:

• Short-term bridging. Draw £20,000 to cover a personal cost, repay it from next quarter's dividend. Clear the balance before the Section 455 deadline.
• Interest-bearing loans. Charge the director interest at or above HMRC's official rate. No benefit in kind. Company receives taxable interest income.
• Formal documentation. Record board minutes for any loan over £10,000. Shareholder approval is required under Companies Act 2006 for loans over £10,000, with narrow exceptions.

What to do if you're already overdrawn

Three options, in order of preference:

1. Repay the loan in cash before the 9-month deadline. Cleanest outcome. No tax.
2. Declare a dividend (if there are distributable reserves) to clear the balance. The dividend is taxable on the director, but no Section 455 tax applies.
3. Declare bonus salary to clear the balance. Taxed as employment income, attracts employer and employee NI, but deductible against Corporation Tax.

If none of these are possible, the company pays Section 455 at 33.75% and reclaims it when the loan is eventually repaid.

The rule that trips up everyone

If a director repays an overdrawn loan and then takes a new one from the same company within 30 days, the repayment is ignored for Section 455 purposes. The anti-avoidance rule exists precisely to stop "bed and breakfasting". There is also a wider "arrangements" rule that catches repayments of £5,000 or more where the intention is to re-borrow.

The bottom line

A directors' loan account is a powerful tool when you understand it and a ticking tax bill when you don't. Monitor the balance monthly. Keep personal expenses off the company card. Declare dividends formally, in writing, with distributable reserves to support them. And if you are approaching year end with an overdrawn balance, act before the 9-month deadline, not after.

If you want your DLA reviewed as part of your accounts and year-end process, S&J includes this in every Insights and Foresight package. See pricing on the quote generator.