What Is a Director's Loan Account?
A director's loan account, often shortened to DLA, is simply a record of the money that flows between a director and their company outside of the normal routes. Salary runs through payroll. Dividends come out of profit. Expenses you have paid for personally get reimbursed. Everything else, every other pound that moves between you and the company, sits in the director's loan account.
It helps to picture it as a running tab. When you take money out that is not salary, dividend or expense repayment, the tab goes one way. When you put your own money in, or leave expenses unclaimed, it goes the other. At any moment the balance tells you one of two things: either the company owes you money, or you owe the company money. Which way round it sits matters enormously, because the tax treatment is completely different depending on the direction.
Every limited company with an active director tends to have a DLA whether the owner realises it or not. If you have ever paid a company bill from your personal card, or dipped into the business account to cover something personal, you have already used it. The account is not optional and it is not exotic. It is one of the most common features of an owner managed company, and also one of the most commonly mishandled.
The Two Directions: In Credit or Overdrawn
The whole subject turns on one question, so it is worth being clear about the language.
- A DLA in credit means the company owes the director. You have put more in than you have taken out, perhaps by lending the business start up cash or paying for costs personally. This is your money sitting inside the company, and you can draw it back tax free whenever the company has the cash.
- An overdrawn DLA (sometimes called a DLA in debit) means the director owes the company. You have taken out more than salary, dividends and genuine expenses account for. In effect the company has lent you money, and HMRC treats it exactly like that.
Most of the trouble happens with overdrawn accounts. A director takes regular drawings through the year expecting to clear them with a dividend or bonus at the year end, the profit does not stretch far enough, and the account is left overdrawn. That is where the tax charges start, and it is the situation this guide spends most time on.
The s455 Tax Charge on an Overdrawn DLA
Here is the rule that catches people out. If your director's loan account is overdrawn at the company's year end and you have not repaid it within nine months and one day of that year end, the company pays a temporary tax charge called section 455, or s455 for short.
The rate matters and it has just gone up. s455 is tied by law to the upper rate of dividend tax, and because that rate rose at the Autumn Budget on 26 November 2025, the s455 rate increased too. For loans made on or after 6 April 2026 the charge is 35.75 percent of the overdrawn balance, up from 33.75 percent. So if you owe the company £30,000 and it is still outstanding nine months after the year end, the company hands HMRC £10,725.
Two features of s455 are worth understanding properly, because they change how you should think about it.
First, it is the company that pays, not you personally. This is a corporation tax charge on the business, separate from anything on your own tax return.
Second, and this is the part people miss, s455 is refundable. It is a deposit, not a permanent cost. Once you repay the loan to the company, HMRC repays the s455 to the company. The catch is the timing: the refund is not automatic and not quick. You reclaim it nine months and one day after the end of the accounting period in which the loan was repaid, so waiting the best part of a year or more to see the money back is normal. Tying up several thousand pounds of company cash for that long is a real cost even though the tax itself is eventually returned.
The clean way to avoid s455 entirely is to clear the overdrawn balance within that nine month and one day window, usually by voting a dividend or a bonus, or by physically repaying the cash. Just remember a dividend is only lawful if the company has the retained earnings to cover it. Clearing an overdrawn loan with a dividend the company cannot legally pay swaps one problem for a worse one.
Beware "Bed and Breakfasting"
HMRC saw the obvious wheeze coming. If s455 only bites on the balance outstanding at the nine month point, why not repay the loan a day before the deadline, then withdraw the same money again a week later?
That trick is called bed and breakfasting, and there are specific anti avoidance rules to stop it. Broadly, if £5,000 or more is repaid and then a similar amount is withdrawn within 30 days, HMRC matches the new withdrawal against the old loan and the repayment does not count. There is also a wider rule that catches arrangements to redraw the money even outside the 30 days where the intention was always to take it back. The practical message is simple: to escape s455 the repayment has to be genuine. Clearing the loan with real money or a properly declared dividend works. Shuffling the same cash in and out around the year end does not.
The Benefit in Kind on Cheap Loans
s455 is not the only charge to watch. There is a separate issue on your personal tax return.
If your overdrawn loan is more than £10,000 at any point in the tax year and the company charges you either no interest or interest below HMRC's official rate, the difference counts as a benefit in kind. In plain terms, a cheap loan from your own company is a perk, and perks are taxable. The benefit is reported on a P11D, you pay Income Tax on it, and the company pays Class 1A National Insurance.
The official rate of interest is the yardstick here. It has been 3.75 percent, and since April 2025 HMRC reviews it quarterly rather than fixing it for the year, so it is worth checking the current figure rather than assuming. The £10,000 threshold is the trigger. Keep the loan under £10,000 all year and no benefit in kind arises. Go over it, even briefly, and the charge applies to the whole benefit. One way owner directors sidestep this is to have the company charge interest at the official rate, which removes the benefit in kind, though the company then has interest income to account for.
When the Company Owes You: Lending Money to Your Own Company
The picture is far friendlier when the account runs the other way. Plenty of directors put their own money into the business, especially in the early days or through a lean patch. That is a director's loan to the company, and it leaves the DLA in credit.
You can draw that money back whenever the company can afford it, and because it is a repayment of your own capital rather than income, there is no Income Tax to pay on it. That makes a director's loan one of the tidiest ways to get money back out of a company you have funded, cleaner in tax terms than a dividend or extra salary.
You can also charge the company interest on what you have lent it. The interest is a deductible cost for the company, reducing its corporation tax, and it is taxable income for you, though the personal savings allowance may cover some of it. The company has to deduct 20 percent basic rate tax from the interest and report it to HMRC each quarter on form CT61, which is a step people often forget. Whether charging interest is worth the paperwork depends on the sums involved, and it is exactly the kind of thing worth a quick conversation before you set it up.
Writing Off a Director's Loan
Occasionally a company decides to write off an overdrawn loan rather than have the director repay it, often when the business is winding down. It can be done, but it is not a free way out.
A written off loan is treated for the director much like a dividend, so it is taxed as income on the personal return at dividend tax rates. It is not a corporation tax deduction for the company either, so you do not get relief on the way out. There can also be National Insurance implications depending on the circumstances. Writing off a loan is sometimes the right answer, particularly at the end of a company's life, but it is rarely the cheap escape route it first looks like, and it is one to plan rather than stumble into.
How the DLA Appears in Your Accounts
For completeness, the director's loan account is a real balance in the company's books, tracked through double entry bookkeeping like any other account. An overdrawn DLA sits as an asset on the balance sheet, because it is money owed to the company. A DLA in credit sits as a liability, because it is money the company owes out. Keeping this account accurate and current is the single most important habit, because you cannot manage a balance you cannot see. Most of the messes we untangle started with a DLA that nobody looked at until the year end.
Our View
The director's loan account is not something to fear, but it is something to respect. Used deliberately, it is a normal and useful part of running a company. Used carelessly, it turns into surprise tax charges and awkward conversations with HMRC.
The mistake we see most often is treating the company bank account as a personal one and only discovering the overdrawn loan when the accounts are drawn up months later. By then the s455 clock has usually been ticking, the chance to plan a clean dividend has passed, and the options are narrower and more expensive. None of that is necessary. An overdrawn DLA that is spotted early can nearly always be managed before it costs anything.
Our advice is boring and it works. Know which way your loan account points at all times. Keep drawings realistic against the profit the company is actually making. If you are going to clear an overdrawn balance with a dividend, make sure the reserves are there to do it lawfully. And if the account is drifting overdrawn, deal with it well before the nine month deadline rather than hoping it sorts itself out. The tax rules around DLAs are strict, but they are also predictable, and predictable problems are the easy kind to avoid.
How IAK Can Help
We look after limited company directors across North London, and the director's loan account is one of the first things we get straight. Our accounting and bookkeeping work keeps your DLA current all year, so you always know where you stand, and our personal tax team plans the salary and dividend mix so overdrawn balances get cleared before s455 ever applies. Where a loan is unavoidable, our tax planning makes sure it is structured to keep both the s455 charge and any benefit in kind to a minimum.
If your loan account has crept overdrawn, or you are not sure which way it points, contact us for a free consultation. We will tell you exactly where you stand and what to do about it, in plain English.
Sources
- Director's loans, GOV.UK, on the rules for taking money out of a company, the s455 charge on overdrawn accounts, repayment and reclaiming the tax.
- CTM61505, HMRC Company Taxation Manual, on the section 455 charge and the nine month and one day due date.
- Changes to tax rates for property, savings and dividend income, GOV.UK, on the rise in the dividend upper rate from 6 April 2026 that lifts the s455 rate to 35.75 percent.
- Rates and allowances: beneficial loan arrangements, GOV.UK, on the official rate of interest and the £10,000 benefit in kind threshold.