What Is a Director’s Loan Account?

A director’s loan account, often shortened to DLA, records money that moves between a director and their company outside of salary, dividends, or expense repayments. If a director takes money out of the company that is not salary or a dividend, the DLA becomes overdrawn, meaning the director effectively owes the company money.

Directors sometimes use a DLA informally, drawing funds during the year and squaring it up with a dividend at year end. This is common, but it comes with real tax consequences if the account stays overdrawn beyond certain deadlines.

Why an Overdrawn DLA Creates a Tax Problem

Section 455 tax charge

If a director’s loan remains overdrawn nine months after the company’s accounting period ends, the company must pay a Section 455 tax charge, currently set at 33.75 percent of the outstanding loan amount, to HMRC. This is not a permanent tax loss. The company can reclaim it once the loan is repaid, but only after a delay, and only by making a separate claim to HMRC.

Benefit in kind charges

If the overdrawn amount exceeds £10,000 at any point during the tax year, HMRC treats the loan as a benefit in kind. This means the director must pay income tax on the notional interest they should have paid, and the company must pay Class 1A National Insurance on that same benefit.

The bed and breakfasting rules

Some directors historically tried to avoid the Section 455 charge by repaying the loan just before the nine month deadline, then redrawing it shortly afterward. HMRC’s “bed and breakfasting” rules specifically target this pattern. If you repay more than £5,000 and redraw more than £5,000 within 30 days, HMRC can treat the repayment as not having happened for Section 455 purposes.

What Happens if the Company Becomes Insolvent

An overdrawn director’s loan account becomes a serious problem if the company enters liquidation. The loan is an asset of the company, meaning the director genuinely owes that money, not to HMRC, but to the company itself. A liquidator has a legal duty to recover company assets for creditors, and that includes calling in an overdrawn DLA. Directors are sometimes surprised to learn that limited company protection does not shield them from repaying a genuine loan they owe the company, regardless of why the company became insolvent.

How to Manage a Director’s Loan Account Properly

• Keep clear, contemporaneous records of every payment in and out of the DLA throughout the year, rather than reconstructing it at year end.
• Repay the loan, or vote a dividend to clear it, before the nine month deadline to avoid the Section 455 charge.
• Avoid bed and breakfasting patterns. If you need to draw funds again after repaying, leave a genuine gap and be able to show the repayment was not simply a paper exercise.
• Get your accountant involved early, particularly if the balance is likely to exceed £10,000, since the benefit in kind rules add real complexity.

Frequently Asked Questions

Is an overdrawn director’s loan account illegal?

No, it is not illegal on its own. Company law generally permits directors to borrow from their company, subject to shareholder approval requirements in some cases. The complications come from the tax consequences and, if the company becomes insolvent, the legal duty to repay it.

How much tax do I pay on an overdrawn DLA?

If the loan is still outstanding nine months after the company’s year end, the company pays a Section 455 charge of 33.75 percent of the outstanding balance. If the balance exceeds £10,000 at any point, additional benefit in kind rules can also apply to the director personally.

Can I just write off my director’s loan instead of repaying it?

You can, but writing off a loan usually creates a different tax charge, since HMRC often treats a written-off DLA as if it were a dividend or, in some cases, employment income, both of which carry their own tax consequences.

What happens to my DLA if my company goes into liquidation?

The liquidator will typically pursue repayment of an overdrawn DLA as a company asset, since it represents money genuinely owed to the company. This applies regardless of the reasons behind the company’s insolvency.

Getting Advice

If your director’s loan account is overdrawn, speak to your accountant well before your company’s year end. Our guides to wrongful trading and personal guarantees cover other ways directors can end up personally liable for company-related money, and our wider guide to financial law covers the broader compliance picture for company directors.

This article gives general information only. It does not constitute legal or tax advice. Tax rates and thresholds change periodically, so always confirm current figures with a qualified accountant or tax adviser before making decisions about your director’s loan account.