What Is a Director's Loan Account and the Tax Implications?
A director's loan account (DLA) records money borrowed by a director from their company, or owed to the director by the company. Every limited company with a director who also draws money from the company beyond their salary and dividends needs to maintain a director's loan account. Getting it wrong can lead to unexpected tax charges for both the company and the director personally.
What Is a Director's Loan Account?
The DLA is essentially a running balance of what the director owes the company (overdrawn account) or what the company owes the director (credit account). Directors often credit their loan account by paying for business expenses personally, lending their own money to the company, or leaving salary or dividends undrawn. Conversely, the account becomes overdrawn when the director withdraws more from the company than they have put in or earned as salary and dividends.
Overdrawn Director's Loan Accounts: Section 455 Tax
If a director's loan account is overdrawn at the end of the company's accounting period, and the balance is not repaid within 9 months and 1 day of that period end, the company must pay a Section 455 tax charge of 33.75% of the outstanding balance. This is a temporary charge — when the director eventually repays the loan, the company can reclaim the Section 455 tax paid, typically in a later accounting period. The reclaim process takes time and the cash flow impact can be significant for small companies.
The £10,000 Threshold and Beneficial Loan Rules
If the balance of a director's loan account exceeds £10,000 at any point during the tax year, the loan is treated as a benefit in kind for the director personally. A beneficial loan arises when interest is charged at less than HMRC's official rate (currently 2.25% for 2025/26 — check HMRC's official guidance as this is updated annually). The deemed benefit is calculated as the difference between what interest was actually charged and interest at the official rate, and is reported on a P11D form. The director pays income tax on the benefit; the company pays Class 1A NI at 13.8%.
How to Manage the DLA
Keep the director's loan account in credit or clear any overdrawn balance within 9 months of the year end. Charge interest at or above HMRC's official rate on any overdrawn balance to avoid the beneficial loan charge. If the director cannot repay in time, consider declaring a dividend (if the company has sufficient retained profits) to formally clear the DLA balance — though this triggers personal tax on the dividend. Ensure the DLA is reconciled monthly so you always know its status.
Loans Into the Company
If a director has a credit balance in their DLA (they have lent money to the company), they can withdraw it at any time tax-free — it is a repayment of a loan, not income. The company can also pay interest on the loan to the director, which is deductible for Corporation Tax. The director must declare the interest as income on their Self-Assessment return and may need to pay tax on it at their marginal rate.
HMRC Scrutiny
HMRC pays close attention to director's loan accounts, particularly in cases where the loan is large, rolled over repeatedly, or in companies where profits and dividends would otherwise be expected. Repeated overdrawn balances that are cleared just before the 9-month deadline may be challenged as disguised dividends — which would be subject to income tax at dividend rates rather than the Section 455 route. Maintain accurate records and document the commercial rationale for any loans.
