Take £5,000 out of your company that isn’t salary, a dividend or an expense claim, and it lands in your director’s loan account (DLA). Think of it as a running tally of what you owe the business, or what the business owes you.
That balance appears in the annual accounts. And if the account is overdrawn, leaving it that way for too long brings tax consequences and some fairly serious legal risks with it.
Key Takeaways
- A director’s loan account records money moving between you and your company that isn’t salary, a dividend or an expense reimbursement.
- Repay an overdrawn loan within nine months and one day of the accounting year end or the company pays a Section 455 (Corporation Tax Act 2010) tax charge on the outstanding balance. The rate is 33.75% for loans made before 6 April 2026 and 35.75% for loans made on or after that date.
- If your outstanding loans exceed £10,000 at any point in the tax year and you pay less than HMRC’s official rate of interest, there’s a taxable benefit in kind. Loans above £10,000 also generally need shareholder approval.
- Companies Act 2006 section 413 requires disclosure of the loan amount, interest rate, terms, and anything repaid or written off.
- Writing a loan off doesn’t make the issue disappear. The write-off is taxed as dividend income, and an overdrawn balance can still become a problem if the company enters insolvency.
What Is a Director’s Loan Account?
A director’s loan account only applies to limited companies because the company is legally separate from the people who run it. Company money isn’t automatically your money. Sole traders don’t have DLAs because there’s no separate legal entity on the other side of the transaction.
Typical entries include cash you withdraw for personal use, personal bills paid from the business account, personal spending on the company card, money taken before a dividend has been formally declared, and money you lend the company to cover a shortfall. Salary paid through PAYE, properly declared dividends and genuine business expense reimbursements don’t go through the DLA.
There’s a wider point for close companies, broadly those controlled by five or fewer participators or by their directors, which covers most owner-managed limited companies. Private payments made to a director’s family or business partner can also need recording, school fees paid directly from the company account being one example.
How It Appears in the Accounts
Your DLA balance sits on the balance sheet at the year end. If you owe the company money, it’s a debtor and an asset of the company. If the company owes you money, it’s a creditor and a liability.
The balance isn’t hidden away. Section 413 of the Companies Act 2006 requires the notes to the annual accounts to disclose the amount, interest rate, terms, and anything repaid or written off, whatever accounting standard is used, including micro-entity accounts, so it’s visible to Companies House, HMRC, lenders, minority shareholders and anyone running a credit check.
Rules and Compliance
Loans above £10,000 generally need prior shareholder approval under Companies Act 2006 s197, subject to statutory exceptions. In a single-director company that may feel like a formality, but it should still be properly minuted and dated when the loan is made, not recreated afterwards. Without approval the transaction can be voidable, though shareholders can subsequently affirm it by resolution.
For tax purposes, the deadline that matters is nine months and one day after the company’s accounting year end. Clear the overdrawn balance by then and there’s no Section 455 charge. The clock runs from the end of the accounting period, not from the day you took the money, so two withdrawals made a few months apart can share exactly the same deadline.
You can clear the balance with cash, with a dividend voted against sufficient distributable profits (taxed personally at 10.75%, 35.75% or 39.35% from 6 April 2026, depending on your band), or through salary or a bonus through payroll, which brings income tax and National Insurance into it instead.
There’s no point repaying and immediately re-borrowing to sidestep the deadline. HMRC’s bed-and-breakfasting rules catch exactly that: repay £5,000 or more and redraw £5,000 or more within 30 days, and the repayment is matched against the new loan, so the original counts as outstanding for Section 455 purposes. Above £15,000, matching can apply even outside the 30-day window if the redrawing was already arranged.
Borrowing Limits and Interest
There’s no statutory maximum you can borrow from your own company, only what the company can afford to lend and you can afford to repay. Any loan of £10,000 or more, tested across the tax year (6 April to 5 April) rather than per withdrawal, is automatically a benefit in kind unless you’re charged interest at HMRC’s official rate, 3.75% for 2026/27.
Here’s how a £20,000 loan outstanding for a full year plays out under each approach:
| Interest-free | Interest charged at 3.75% (official rate) | |
|---|---|---|
| Taxable benefit in kind | £750 | None |
| Income tax (higher-rate taxpayer) | £300 | — |
| Company’s Class 1A NI (15%) | £112.50 | — |
| Interest received by company | — | £750 |
| Corporation tax on that interest | — | £187.50 at 25% main rate, or £142.50 at 19% small profits rate (taxable profits £50,000 or below) |
Charging the official rate removes the benefit-in-kind charge, but the interest still costs you: it comes out of your own taxed income, and the company pays corporation tax on what it receives.
Tax Implications
Taking a director’s loan isn’t itself taxable. Two things change that.
One is the benefit-in-kind charge above. The other is a write-off: if a close company writes off a loan to a participator, the amount is treated as dividend income. On a £30,000 write-off for a higher-rate taxpayer, that’s £10,725 at the current 35.75% upper dividend rate, before the £500 dividend allowance. Writing off the balance isn’t a tax-free way of clearing it.
Section 455 works differently again. If the loan is still outstanding nine months and one day after the accounting period ends, the company pays tax on the balance at the rate in force when the loan was made, 33.75% for loans made between 6 April 2022 and 5 April 2026, and 35.75% for loans made on or after 6 April 2026. A single DLA can contain drawings made on different dates, so one overall balance can carry more than one rate.
It’s a holding charge, not a permanent cost. Once the loan is repaid, released or written off, the company can claim relief via form L2P or by amending the CT600A, within four years of the end of the accounting period the repayment falls in. The refund itself isn’t due until nine months and one day after that period ends, so it’s slow, and any interest HMRC charged on the late Section 455 tax isn’t refunded.
Clearing the balance with a dividend needs distributable profits, and creates a personal tax bill in the tax year it’s voted, regardless of the company’s year end. Without profits, a payroll bonus works but adds National Insurance; repaying from personal funds costs no tax but needs the cash.
Director’s Loans vs Other Payments
Salary is taxed immediately through PAYE and reduces the company’s taxable profit. A loan isn’t taxed on withdrawal. Dividends sit between the two: paid from distributable profits, taxed personally, no National Insurance, but if the company doesn’t have the profits to support it, a “dividend” ends up in the director’s loan account regardless of what the paperwork called it. Treat a loan as a short-term tool, not a routine way to pay yourself.
A Worked Example
Year end 31 March 2026. You take £6,000 in May 2025 and £6,000 in September 2025, £12,000 overdrawn. That’s over £10,000, so it’s a benefit in kind if under-charged on interest, and should have had shareholder approval before the loan was made.
The Section 455 deadline is 1 January 2027. Clear the £12,000 by then and no charge arises; miss it, and the company pays Section 455 on the balance. Because both drawings were made before 6 April 2026, the applicable rate is 33.75%, the repayment deadline falling in 2027 doesn’t move them onto the later 35.75% rate.
Lend the company money instead and the account goes into credit: the company can repay it tax-free at any time, since it’s your own money. If the company pays you interest on it, it deducts 20% income tax at source and reports it via a quarterly CT61 return.
The Risks of Leaving a Loan Unpaid
If the company becomes insolvent, an overdrawn DLA is a debt owed to the company, and an insolvency practitioner can pursue you personally for it, including bankruptcy proceedings. Limited liability doesn’t help here, since this isn’t one of the company’s debts, it’s yours to the company.
A common route to a large overdrawn balance is the “illegal dividend”: money drawn through the year on the assumption profits will support it, which turns out not to be the case once the numbers are finalised, and gets reclassified as a director’s loan. Writing it off doesn’t dodge this either, it’s still taxed as a deemed dividend, and can still be challenged in an insolvency.
Why Get an Accountant Involved
If you don’t know your loan account balance, your year end, or whether a recent withdrawal falls inside the nine-month window, find out now rather than when the tax return is being prepared.
At Reed & Co, we check director’s loan accounts as standard when preparing annual accounts and company tax returns, looking at what’s been taken out, what’s been put back, the dates involved, and whether a tax charge needs dealing with.
Get in touch, and we’ll check where your loan account stands and what, if anything, needs sorting before your next deadline.
