How Does a Director’s Loan Account Work?
If you are a company director, understanding your Director’s Loan Account (DLA) is crucial for managing your finances efficiently and staying compliant with HMRC rules.
In this post, we will cover:
What a director’s loan account is
Examples of what can go through the DLA
The tax impact of an overdrawn loan account
Key considerations to avoid unnecessary tax charges
What is a Director’s Loan Account?
A Director’s Loan Account is a record in your company’s books of any money you, as a director, take from or lend to your company that is not salary, dividend, or expense reimbursement.
In simple terms, it tracks personal transactions between you and your company.
Examples of What Can Go Through a Director’s Loan Account
Money you take from the company:
Personal payments made from the company’s bank account on your behalf
Cash withdrawals for personal use
Using company funds to pay for personal bills
Money you put into the company:
Paying company expenses from your personal funds
Lending money to the company to help with cash flow
These entries are logged in your DLA, and your balance will show either:
Credit (the company owes you money)
Debit (you owe the company money, also called an overdrawn director’s loan)
What Happens if Your Director’s Loan Account is Overdrawn?
If you owe money to the company at your company’s year-end (i.e., your DLA is overdrawn), there can be tax implications:
1. Section 455 Tax Charge
If the loan is not repaid within 9 months and 1 day after your company’s year-end, the company must pay 32.5% tax on the outstanding balance to HMRC.
For example:
Your company’s year-end: 31 March 2025
Overdrawn DLA balance: £10,000
Repayment deadline: 1 January 2026
If not repaid by this date, your company pays £3,250 to HMRC. This tax is refundable once the loan is repaid, but it can create a significant cash flow strain in the meantime.
2. Benefit in Kind (BIK) and Personal Tax
If the loan exceeds £10,000 at any point during the year and you pay no (or low) interest, it is treated as a Benefit in Kind, and:
The company may pay Class 1A National Insurance (13.8%) on the calculated benefit
You may pay personal tax on the deemed benefit
Note: You can avoid the BIK charge if you pay the official HMRC interest rate (currently 2.25% as of July 2025) on the overdrawn balance.
How to Avoid Issues with a Director’s Loan Account
Keep clear records: Ensure all personal transactions are correctly recorded in your accounts.
Plan repayments: If you take funds from your company, plan to repay within 9 months of year-end to avoid the Section 455 charge.
Avoid serial repayment and re-borrowing: HMRC can apply “bed and breakfasting” rules if you repay a loan and re-borrow over £5,000 within 30 days, treating the repayment as ineffective for tax purposes.
Seek advice: If you need funds from your company, consult your accountant to consider tax-efficient alternatives, such as dividends or salary, depending on your circumstances.
Final Thoughts
A Director’s Loan Account can be a helpful tool for managing cash flow between you and your company. However, taking funds without a plan to repay can lead to unexpected tax bills and interest charges.
If you are considering taking a loan from your company or want to ensure your DLA is being managed correctly, we’re here to help. Contact our team at NF Accounting for clear, proactive advice tailored to your business.