A director’s loan account records money moving between a limited company and its director outside normal salary, dividends and reimbursed expenses. It can be in credit because the company owes the director, or overdrawn because the director owes the company.
Although the bookkeeping looks simple, an overdrawn director’s loan account can trigger company tax, benefit reporting, personal tax and cash-flow problems. This guide explains the key UK rules, including the higher section 455 rate that applies to relevant loans made from 6 April 2026.
What is a director’s loan account?
A director’s loan account, often shortened to DLA, is a balance sheet account. It tracks transactions between a director and the company that are not ordinary business expenses, payroll or valid dividends.
The account may include money introduced by the director, personal bills paid by the company, cash withdrawals, repayments, expenses paid personally and amounts formally credited as salary or dividends.
In credit vs overdrawn
| Position | Meaning | Typical consequence |
|---|---|---|
| In credit | The company owes the director | The company can normally repay the balance without further personal tax |
| Overdrawn | The director owes the company | Company tax and benefit rules may apply |
| Nil | Neither party owes the other | No loan remains outstanding |
A DLA can change position throughout the year. Directors therefore need transaction-level records, not just the balance shown in annual accounts.
How does a director’s loan account become overdrawn?
Common causes include withdrawing money before a dividend is declared, charging personal purchases to the company card, paying personal tax from the company account or taking more than the salary processed through payroll.
A bookkeeping description does not determine the legal or tax treatment. Calling a payment “drawings” does not make it acceptable in a limited company because company money is separate from the director’s money.
The nine-month repayment rule
Where a close company lends money to a shareholder-director and the balance remains outstanding nine months and one day after the end of the Corporation Tax accounting period, the company may have a section 455 tax charge.
For example, if the accounting period ends on 31 March, the normal Corporation Tax payment date is 1 January. Repayment timing should be checked against the exact accounting period rather than assumed from the personal tax year.
Section 455 tax from 6 April 2026
The section 455 charge is linked to the dividend upper rate. For relevant loans or benefits made on or after 6 April 2026, the rate is 35.75%. Earlier loans may be subject to previous rates, including 33.75% for loans made from 6 April 2022 to 5 April 2026.
This is a tax paid by the company on the outstanding loan; it does not clear the director’s debt. Interest can accrue on unpaid Corporation Tax.
The company may claim relief after the loan is repaid, released or written off, but repayment is not immediate. Relief generally cannot be obtained until nine months and one day after the end of the accounting period in which the repayment or other relevant event occurs.
The £10,000 beneficial loan threshold
An interest-free or low-interest loan can create a taxable benefit for the director. Where the total balance exceeds £10,000 at any point in the tax year, the company may need to calculate a beneficial loan benefit using HMRC’s official interest rate.
The benefit is normally reported on form P11D and can create Class 1A National Insurance for the company. Charging and actually paying sufficient interest by the required date may change the treatment, but records and timing must be correct.
The official interest rate can change. Use the rate applying to the relevant tax year rather than copying an old calculation.
What if the director lends money to the company?
When the DLA is in credit, the company owes the director. Repayment of the original capital is generally not taxable income for the director.
If the company pays interest, that interest is personal income and should be reported. The company normally deducts Income Tax at the basic rate and accounts for it quarterly using form CT61. Interest can be deductible for the company when it meets the normal business rules.
Can a dividend clear an overdrawn loan?
A valid dividend may be credited against the loan if the director is a shareholder and the company has sufficient distributable profit. The dividend must be properly declared, recorded and taxed in the shareholder’s hands.
A year-end journal cannot turn an unlawful withdrawal into a valid dividend. Directors need evidence that adequate reserves existed when the dividend was declared.
Can salary or a bonus repay the loan?
A salary or bonus credited to the director can reduce the balance, but it must be processed through PAYE and supported by a genuine remuneration decision. Income Tax and National Insurance can make this more expensive than expected.
The company also needs enough cash to pay the payroll liabilities. Simply posting a journal without meeting the payroll rules creates unreliable accounts.
Bed and breakfasting rules
Anti-avoidance rules can apply when a director repays a loan shortly before the nine-month deadline and then borrows again. HMRC may match the repayment with a later withdrawal, preventing the temporary repayment from achieving the intended section 455 relief.
Linked arrangements and larger repayments followed by new borrowing also need careful review. Do not move money in and out solely to make the year-end balance appear lower.
What happens if a director’s loan is written off?
Writing off or releasing the balance does not mean the tax problem disappears. The director-shareholder can face an income tax charge, while benefit and National Insurance reporting may also apply.
Tax treatment depends on the relationship between the director and company and the facts of the release. Obtain advice before approving a write-off.
Director’s loans during insolvency
An overdrawn DLA is an asset of the company. If the company enters liquidation, the liquidator can pursue the director for repayment. The money still belongs to the company and may be needed for creditors.
Directors should not assume that closing or striking off the company cancels the debt. A growing overdrawn balance is also an important warning sign when cash flow is under pressure.
Common director’s loan account mistakes
- Using the company bank card for personal spending.
- Taking dividends without sufficient distributable profit.
- Waiting until year end to classify withdrawals.
- Ignoring the £10,000 beneficial loan threshold.
- Missing P11D or Class 1A National Insurance reporting.
- Assuming section 455 tax clears the loan.
- Repaying just before the deadline and borrowing again.
- Failing to separate loans involving different directors.
- Using stale management accounts when declaring dividends.
- Forgetting that company-paid personal tax is a withdrawal.
How to keep the DLA under control
- Use separate business and personal bank accounts.
- Process director salary through payroll on time.
- Approve dividends only after reviewing current profit and reserves.
- Record expenses paid personally and reimburse them accurately.
- Reconcile the loan account at least monthly.
- Set a written repayment plan for an overdrawn balance.
- Forecast the nine-month deadline and any section 455 charge.
- Review benefit reporting before the end of the tax year.
A simple example
A shareholder-director withdraws £20,000 that is not salary, an expense repayment or a valid dividend. The amount is posted to the DLA, leaving it overdrawn. If it remains outstanding nine months and one day after the company year end, section 455 tax may be due.
If the loan was made after 5 April 2026, a 35.75% charge on £20,000 would be £7,150, subject to the detailed rules. The director still owes £20,000. A beneficial loan calculation and reporting may also be required because the balance exceeded £10,000.
This example shows why the company and personal consequences must be considered together.
Get help with your director’s loan account
A DLA should be an actively managed record, not a year-end surprise. Real Key Accountancy can reconcile the account, review withdrawals, forecast tax and put proper salary and dividend records in place.
Contact us if your director’s loan account is overdrawn or you want to prevent problems before the next company year end.
Frequently asked questions
Is a director’s loan the same as salary?
No. Salary is employment income processed through payroll. A loan is repayable money and has different tax rules.
Can I repay a director’s loan in instalments?
Yes, but the balance outstanding at relevant deadlines determines the potential tax position. Record every repayment and avoid immediate re-borrowing.
Does section 455 tax get refunded automatically?
No. The company must claim relief after the qualifying repayment, release or write-off, and statutory timing rules delay when relief becomes available.
Can the company owe the director money?
Yes. A credit balance commonly arises when the director introduces funds or pays company expenses personally.
This article is general information, not personalised tax or insolvency advice. Rules and official interest rates can change.