Director Loan Account Guide for UK Companies
The company card pays for a personal repair, cash is transferred out to cover a busy month, or a supplier invoice is paid personally and claimed back later. For many owner-managed businesses, this is everyday life. This director loan account guide explains how those transactions should be recorded, when they create a tax issue and how to keep control before a small balance becomes an expensive problem.
A director's loan account, often shortened to DLA, is not something to fear. It is simply the running record of money moving between a director and their limited company outside normal salary, dividends and properly claimed business expenses. The key is knowing which side of the account you are on and acting early where a balance is building.
What is a director loan account?
Your director loan account tracks amounts the company owes you and amounts you owe the company. It is usually shown in the company accounts and should be kept up to date throughout the year, not reconstructed from bank statements at the last minute.
If you put your own money into the company to cover materials, fuel or a quiet trading period, the company owes you money. This is a credit balance in your favour. You can normally withdraw that money later without further personal tax, provided it is genuinely repayment of funds you introduced.
If you take money from the company for personal use and it is not salary, a declared dividend or repayment of a legitimate expense, you owe the company money. This is an overdrawn director loan account. It is where the main tax and compliance considerations arise.
For a working director, the distinction can be easy to blur. Paying for a business tool personally is not the same as taking company money for household bills. A good bookkeeping process separates those transactions clearly, with receipts and sensible descriptions.
How money should be taken from a limited company
There are three common ways for directors to take money out of a company. Each has different paperwork and tax treatment.
Salary must go through payroll, with PAYE and National Insurance handled correctly. Dividends can only be paid from available distributable profits and need to be properly declared, with minutes and dividend vouchers retained. Reimbursement of business expenses should be supported by receipts and relate wholly to the business.
Anything else may go through the director loan account. That does not automatically make it wrong. A short-term loan can be a practical solution, particularly where income is seasonal or a customer pays late. Problems start when regular personal withdrawals are treated casually, without a repayment plan or any check on the company’s profits and cash position.
Calling a payment a dividend after the event does not fix the position if the company did not have sufficient distributable reserves when it was paid. Likewise, putting personal spending through the business because there is money in the bank can leave the director with a loan balance, even if the company is trading well.
The tax position on an overdrawn account
Where a director is also a shareholder, an overdrawn loan account that remains outstanding can lead to a Corporation Tax charge under the rules commonly known as section 455.
If the loan is still unpaid nine months and one day after the end of the accounting period, the company may have to pay a charge at 33.75% of the outstanding balance. This is paid with the Corporation Tax return. It is not a permanent tax in the usual sense, because the company can generally reclaim it after the loan has been repaid, released or written off. But that reclaim is not immediate, so it can tie up a sizeable amount of company cash.
For example, if a company with a 31 March year end has a director loan of £20,000 still outstanding, it will need to consider the section 455 charge if the balance has not been cleared by 1 January of the following year. A 33.75% charge on that sum is £6,750. That is cash the business may need for VAT, payroll, materials or subcontractors.
The amount reported should reflect the genuine balance at the deadline. Trying to repay the loan shortly before the deadline, then drawing the same money out again soon afterwards, can trigger HMRC’s anti-avoidance rules. These rules can apply where repayments of £5,000 or more are followed by further borrowing within 30 days. They can also apply to larger repayments where there are arrangements or an intention to take out further loans.
Interest and benefit-in-kind rules
A separate issue can arise where the company lends a director more than £10,000 at any point in the tax year and charges no interest, or interest below HMRC’s official rate. The loan may create a taxable benefit in kind for the director.
In that situation, the company will usually need to report the benefit and pay Class 1A National Insurance. The director may have personal tax to pay on the benefit. The precise calculation depends on the balance, the rate charged and the dates involved, so it is worth reviewing the loan before the end of the tax year rather than waiting for accounts preparation.
Charging interest can sometimes avoid or reduce the benefit, but it needs to be paid to the company and recorded correctly. Whether this is worthwhile depends on the size and expected duration of the loan. It is not always the simplest option for a small, short-term balance.
Repaying, clearing or writing off the loan
The cleanest route is normally to repay an overdrawn loan using personal funds. This is straightforward where the director has money available and wants to keep the company position tidy.
A company may also clear part of a loan through a salary payment, provided it is put through payroll, or through a dividend if sufficient distributable profits exist and the correct documents are prepared. Both routes have personal tax consequences, so the choice should be based on the company’s figures and the director’s wider income, not simply on what feels easiest.
Writing off a director loan is different again. The company gives up its right to be repaid, which can create tax for the director. For a shareholder-director, it is often treated as dividend income. In other circumstances, it may be treated as employment income. A write-off should never be used as a casual bookkeeping entry, particularly where the company has creditors or is under financial pressure.
Keep the account accurate throughout the year
The most useful protection is a current director loan account report. Your bookkeeper or accountant should be able to show the balance at any time, along with the transactions making it up. If the balance is growing, you can decide whether to repay it, adjust future drawings or plan a legitimate dividend before deadlines become an issue.
Use the company bank account for business spending wherever possible. Where you pay a company expense personally, keep the receipt and record it promptly. Where the company pays a personal cost, identify it immediately rather than leaving it in a vague expenses category.
It also helps to set a regular drawings amount. Many small company directors take a planned combination of salary and dividends, then review it quarterly against profits, cash flow and upcoming liabilities. This is more manageable than taking ad hoc amounts and hoping the year-end accounts will sort them out.
Company law and cash-flow considerations
Tax is not the only concern. Loans to directors can require approval under company law, particularly where the amount is significant. The rules and exemptions depend on the company’s circumstances, so check the position before making or extending a sizeable loan.
An overdrawn account can also give a misleading picture of the company’s available cash. Money owed by a director is an asset on paper, but it cannot pay a VAT bill until it is actually repaid. If the company is struggling to meet suppliers, staff costs or tax liabilities, continued drawings may create more serious concerns.
This matters especially in trades where cash flow moves quickly. A subcontractor waiting on a CIS payment, a landlord covering a void period or a cab driver replacing a vehicle may all face real short-term pressure. The answer is not to ignore the loan account. It is to plan the cash movement properly and make sure the company remains able to meet its obligations.
When to ask for advice
Get the account reviewed if you are unsure whether a payment was salary, dividend, expense or loan; if the balance is approaching £10,000; if your accounting period is ending with a loan outstanding; or if you are considering writing it off. Early advice can often turn a tax charge into a manageable plan.
A director loan account should support the way you run your business, not become a hidden source of tax, paperwork and pressure. Keeping it visible, accurate and actively managed gives you clearer choices when money needs to move - and more confidence that your company is on the right side of HMRC’s rules.
