Director's Loan Accounts: What Limited Company Directors Need to Know

A limited company is legally separate from its directors and shareholders.

This means the money in the company’s bank account does not automatically belong to the director personally.

Money moving between a director and their company therefore needs to be recorded correctly.

A director’s loan account, often shortened to DLA, is the accounting record used to keep track of certain amounts owed between the director and the company.

Understanding the balance is important because an overdrawn director’s loan account can result in additional tax consequences for both the company and the director.

For an overview of the different ways to take money from your company, read How Should I Pay Myself from My Limited Company?.

What is a director’s loan account?

A director’s loan account records relevant transactions between a director and the company.

A director’s loan generally arises when a director takes money from the company that is not:

• Salary or wages
• A dividend
• Reimbursement of a genuine business expense
• Repayment of money previously introduced or lent to the company

The account can also record money that the director pays into the company or genuine company expenditure paid personally by the director.

The balance can therefore move in either direction.

What does it mean if my director’s loan account is in credit?

If your director’s loan account is in credit, the company owes money to you.

For example, this might happen if:

• You lent money to the company when it started
• You introduced additional funds
• You personally paid genuine company expenses
• Money owed to you has been credited to the loan account

Repayment of money genuinely owed to you by the company is not the same as taking a new salary or dividend.

For example, if you have previously lent the company £10,000 and the company later repays that £10,000, it is normally repaying an existing debt.

A credit in the loan account does not automatically mean money can be withdrawn tax-free. The underlying transaction must be genuine and correctly recorded.

Can I charge my company interest on money I lend it?

Potentially, yes.

Where a director lends money to their company and charges interest, the company may potentially obtain Corporation Tax relief for qualifying interest.

However, the interest is personal income of the director.

The company normally needs to deduct Income Tax at the basic rate from qualifying yearly interest paid to the director and account for this to HMRC using the CT61 process.

The director normally reports the interest income for personal tax purposes.

What does an overdrawn director’s loan account mean?

If your director’s loan account is overdrawn, you owe money to the company.

This can happen where you take money from the company that has not been treated as salary, a valid dividend, an expense reimbursement or repayment of money already owed to you.

It can also arise where the company pays personal expenditure on your behalf.

For example:

• You transfer £5,000 from the company bank account to yourself without treating it as salary or dividend
• The company pays a personal bill for you
• You take regular drawings from the company in excess of amounts properly credited to your loan account

The amount is not automatically a dividend simply because the director is also a shareholder.

Important

A limited company is not the same as a sole trader. A director cannot simply take drawings from a limited company and treat the company’s money as their own. The payment needs to be correctly identified and recorded.

What happens at the company’s year end?

The director’s loan account balance needs to be reflected in the company’s accounts.

If the director owes money to the company, the balance is normally shown as an amount owed to the company.

If the company owes money to the director, the balance is normally shown as a liability of the company.

An overdrawn loan can also need additional disclosure in the company’s accounts depending on the circumstances.

For a shareholder-director of a close company, an overdrawn balance can also bring the s455 tax rules into consideration.

What is s455 tax?

Section 455 tax is a tax charge that can arise where a close company makes a loan or advance to a participator, which commonly includes a shareholder-director.

For loans made from 6 April 2026, the current s455 rate is 35.75%.

The charge is paid by the company.

The s455 charge is not simply the director’s personal Income Tax bill and it is not ordinary Corporation Tax on the company’s trading profit.

The company can potentially obtain relief for the s455 charge when the relevant loan is genuinely repaid, released or written off, subject to the rules and timing requirements.

What is the 9 months and 1 day rule?

Where the relevant director’s loan is repaid within 9 months and 1 day of the end of the company’s Corporation Tax accounting period, an s455 payment can normally be avoided, subject to anti-avoidance rules.

If the relevant amount remains outstanding after that point, the company can become liable to s455 tax on the outstanding loan.

Example

A company has a 31 March 2027 year end.

At 31 March 2027, its shareholder-director owes the company £20,000.

If the relevant loan remains outstanding after 1 January 2028, the company can become liable to s455 tax.

If the entire £20,000 relates to loans made from 6 April 2026 and is chargeable at the current 35.75% rate, the s455 charge would be:

£20,000 x 35.75% = £7,150

This is a simplified example. The actual treatment can depend on when loans were made, repayments and other circumstances.

Important

The 9 months and 1 day rule is measured from the end of the company’s Corporation Tax accounting period. It is not simply nine months from the date the director borrowed the money.

Can the company reclaim s455 tax when I repay the loan?

Potentially, yes.

Where s455 has been paid and the relevant loan is later genuinely repaid, released or written off, the company can potentially claim relief.

However, the repayment of the s455 tax is not necessarily immediate.

HMRC states that relief becomes due 9 months and 1 day after the end of the Corporation Tax accounting period in which the loan was repaid, released or written off.

The claim also needs to be made within the relevant time limit.

Interest charged by HMRC on late-paid s455 is not itself reclaimed simply because the underlying s455 tax later becomes repayable.

Can I just repay the loan and borrow the money again?

This needs careful treatment.

There are anti-avoidance rules designed to prevent directors temporarily repaying loans simply to avoid the s455 charge and then taking the money back shortly afterwards.

The 30-day rule

Broadly, where repayments totalling £5,000 or more and new relevant loans totalling £5,000 or more occur within the relevant 30-day period, the legislation can match the repayment against the new borrowing.

This can prevent the repayment from obtaining the intended s455 relief on the earlier loan.

The arrangements rule

A separate rule can potentially apply outside the 30-day period.

Broadly, where at least £15,000 is outstanding before a repayment and arrangements exist at that time for at least £5,000 to be borrowed again, the repayment can potentially be matched with the new borrowing.

This rule does not have the same 30-day time limit.

Important

Temporarily repaying a director’s loan shortly before the s455 deadline and then taking the money back may not achieve the intended tax result. The anti-avoidance rules need to be considered where money is repaid and subsequently redrawn.

What is the £10,000 beneficial-loan rule?

The beneficial-loan rules are separate from s455.

An interest-free or low-interest loan provided to a director or employee can potentially create a taxable benefit.

There is generally an exemption where the combined outstanding balance of qualifying loans does not exceed £10,000 at any time throughout the tax year.

If the balance goes above £10,000 at any point, the small-loan exemption can be lost and a taxable beneficial-loan calculation may be required.

The benefit is broadly based on the difference between:

• Interest calculated using HMRC’s official rate, and
• Interest actually paid by the director

The company may also have a Class 1A National Insurance liability on the taxable benefit where the relevant conditions apply.

Important

The £10,000 beneficial-loan threshold and the 9 months and 1 day s455 rule are separate tests. A loan can potentially have benefit-in-kind consequences even where it is repaid in time to avoid an s455 payment.

Does charging interest avoid the beneficial-loan charge?

It can affect the amount of the taxable benefit.

Where the director pays interest at least equal to the appropriate HMRC official rate and the relevant conditions are satisfied, there may be no taxable beneficial-loan amount.

If interest is charged below the official rate, a benefit can potentially arise based on the shortfall.

Charging interest does not itself eliminate the separate s455 issue where that legislation applies.

Can I clear my director’s loan with a dividend?

Potentially.

Where the director is also a shareholder, a valid dividend can potentially be credited to the director’s loan account and reduce or clear the amount owed.

However, a company can only lawfully pay a dividend where it has sufficient distributable profits and the dividend is properly declared.

A dividend cannot simply be backdated because the director has already withdrawn too much money.

The timing of when the dividend is properly paid or credited is also relevant.

Important

An overdrawn director’s loan does not automatically become a dividend at the year end. A dividend needs to be legally available, properly declared and correctly recorded.

For more on salary and dividends, read How Should I Pay Myself from My Limited Company?.

Can salary or a bonus clear a director’s loan?

Potentially.

Salary, a bonus or other remuneration that is genuinely due to the director can potentially be credited to the loan account.

However, PAYE and National Insurance consequences may arise and the remuneration needs to be dealt with correctly through payroll.

It should not simply be backdated or re-labelled after the event without considering the actual facts and payroll obligations.

What happens if the company writes off the loan?

Writing off or releasing a director’s loan does not simply make the tax problem disappear.

Where a loan to a shareholder-director is released or written off, tax consequences can arise for the individual.

The director may need to pay Income Tax on the amount released or written off.

National Insurance consequences can also arise. HMRC’s current guidance states that where a relevant loan to a participator who is also an employee is written off or released, Class 1 National Insurance can apply.

The company may also become entitled to relief from a previous s455 charge, subject to the relevant rules.

Important

Writing off an overdrawn director’s loan is not the same as repaying it and can create its own Income Tax and National Insurance consequences.

Seek professional advice before writing off a material loan so that the company and personal tax consequences can be considered.

What happens if the company becomes insolvent?

Money owed by a director to the company remains an asset of the company.

An overdrawn director’s loan does not disappear because the company enters liquidation or becomes insolvent.

A liquidator can seek repayment of money owed by the director.

Can personally paid business expenses reduce my director’s loan?

Potentially, yes.

If a director personally pays a genuine company expense, the company may owe that amount to the director.

Where correctly recorded, this can increase a credit balance or reduce an amount the director owes the company.

For example, a director might personally pay for:

• Business software
• Office supplies
• Qualifying business travel
• Other genuine company expenditure

The underlying expense still needs to be a genuine company cost and appropriate evidence should be retained.

For more on qualifying costs, see What Expenses Can I Claim Through My Limited Company?.

Can I take money from a director’s loan account that is in credit?

Where the company genuinely owes money to the director, repayment of that debt is generally different from taking salary or a dividend.

For example, if a director previously lent the company £20,000 and the company later has sufficient cash to repay £5,000, that payment can reduce the amount owed to the director.

However, the bookkeeping needs to establish that a genuine credit balance exists.

Why good bookkeeping matters

Director’s loan accounts can become difficult to untangle where personal and company transactions are mixed together.

Good records should make clear:

• Money introduced by the director
• Money withdrawn by the director
• Personal expenditure paid by the company
• Company expenditure paid personally by the director
• Salary and bonuses
• Dividends
• Expense reimbursements
• Interest
• Loan repayments

Regularly reviewing the DLA balance can also identify a potential overdrawn position well before the company’s year end or tax payment deadline.

This is preferable to discovering a significant overdrawn balance when the annual accounts are prepared.

Common director’s loan account mistakes

Common mistakes to avoid include:

• Treating the company bank account as personal money
• Calling every withdrawal a dividend
• Declaring dividends without sufficient distributable profits
• Forgetting personal expenditure paid by the company
• Failing to record company expenses paid personally
• Assuming repayment within 9 months always eliminates every tax consequence
• Ignoring the separate £10,000 beneficial-loan rules
• Repaying a loan temporarily and immediately borrowing it again
• Confusing a credit DLA with an overdrawn DLA
• Waiting until the year-end accounts are prepared before checking the balance

How can Baldwin’s Accountancy Services help?

We can help limited company directors understand and manage their director’s loan accounts as part of their ongoing accounting and tax affairs.

Depending on the circumstances, this can include:

• Reviewing the director’s loan account balance
• Identifying amounts owed to or by the director
• Recording personally paid company expenses correctly
• Reviewing potential s455 liabilities
• Considering beneficial-loan implications
• Reviewing dividends and remuneration used to clear a loan
• Preparing the relevant year-end accounts and Corporation Tax information
• Helping directors plan withdrawals from the company more effectively