What Is a Director’s Loan Account?

Skyrock Accountants
1 hour ago
3 min read

If you run a limited company, you cannot treat the business bank account as your personal account.

This is because a limited company is a separate legal entity from you as the director. GOV.UK explains how limited companies work here:https://www.gov.uk/running-a-limited-company

A Director’s Loan Account (DLA) is simply a record of money that moves between you (owner) and your company that is not:

Salary through payroll
Dividends properly declared
Reimbursement of business expenses

If money moves outside those routes, it goes through the Director’s Loan Account.

Two Ways a Director’s Loan Account Can Work

1️⃣ The Company Owes You Money (Credit Balance)

This happens when you personally put money into the company.

✅ Example 1: Start-up Funding

You set up a new limited company and deposit £5,000 of your own savings into the business bank account.

That £5,000 is not income. It is a loan from you to the company.

Your Director’s Loan Account now shows: Company owes you: £5,000

You can withdraw that £5,000 later without paying tax because it is simply a repayment of your own money.

✅ Example 2: Paying for Business Costs Personally

You use your personal card to pay £1,200 for business equipment.

Instead of claiming it through payroll, the company records it in your DLA.

Your Director’s Loan Account now increases by £1,200.

Again, the company owes you this money and can repay it tax-free.

2️⃣ You Owe the Company Money (Overdrawn Loan)

This is where most problems arise.

An overdrawn DLA happens when you take money out of the company that is not salary or dividends.

❌ Example 3: Taking Informal Drawings

Your company has £40,000 in the bank.

You transfer £10,000 to your personal account without:

Running payroll
Declaring dividends

That £10,000 becomes a loan from the company to you.

Your Director’s Loan Account now shows: You owe the company: £10,000

What Happens If You Don’t Repay It?

If your Director’s Loan Account is overdrawn at year-end and not repaid within 9 months and 1 day, the company may have to pay additional tax under Section 455 rules.

HMRC guidance explains this here:https://www.gov.uk/directors-loans

This tax is currently 33.75% of the outstanding loan.

❌ Example 4: Section 455 Tax

Overdrawn DLA at year-end: £20,000
Not repaid within 9 months

Company must pay:£20,000 × 33.75% = £6,750

The company can reclaim this tax once the loan is repaid — but it creates a cash flow issue.

What If the Loan Is More Than £10,000?

If you owe the company more than £10,000 at any time during the year and no interest is charged, it may create a benefit in kind issue. Official guidance is here:

This can result in:

Personal tax for you
National Insurance for the company

A Real-World Scenario

Let’s say:

Your company makes £60,000 profit
You take £30,000 during the year
Only £15,000 was declared as dividends

The remaining £15,000 sits in your DLA as an overdrawn loan.

If not managed properly, this can:

Trigger Section 455 tax
Cause benefit-in-kind reporting
Create compliance problems

This is why dividend planning matters.

Dividend tax rules are explained here:https://www.gov.uk/tax-on-dividends

Common Mistakes Directors Make

Treating the company like a sole trader business
Taking regular “drawings”
Declaring dividends without checking profits
Clearing the loan before year-end and borrowing again shortly after (anti-avoidance rules can apply)

Is a Director’s Loan Account Always a Problem?

No.

In fact, many well-run companies use DLAs properly:

Directors lend money to the company in early years
Directors temporarily withdraw funds and repay quickly
Structured tax planning is done before year-end

The key is recording and reviewing the balance regularly.

Simple Summary

A Director’s Loan Account is:

A record of money between you and your company
Not salary
Not dividends
Not expenses

If the company owes you → usually no issue.If you owe the company → manage it carefully.

Because once tax deadlines pass, the cost can be significant.

Here is a shorter, sharper version that still drives action:

Need Help With Your Director’s Loan Account?

If you have taken money from your company and are unsure whether it was recorded correctly, it is worth reviewing your Director’s Loan Account before year-end.

An overdrawn balance can trigger unexpected tax charges and cash flow issues if not dealt with in time.

At Skyrock Accountants, we help limited company directors: