A director's loan account (DLA) is one of the most commonly misunderstood aspects of running a limited company. Get it right and it's a perfectly legitimate way to manage the flow of money between you and your company. Get it wrong and you could face an unexpected tax bill, a benefit-in-kind charge, or — in the worst case — an HMRC investigation.
This guide explains what a DLA is, when it becomes a problem, and how to manage yours properly.
What Is a Director's Loan Account?
A director's loan account is simply a record of all the money that flows between you (the director) and your company that isn't salary, dividends, or legitimate expense reimbursements. It works like a running tab. When you put personal money into the company — for example, to cover startup costs — the DLA shows the company owes you. When you take money out of the company that isn't salary or dividends, the DLA shows you owe the company.
The DLA is an accounting record, not a bank account. It exists in your company's books and tracks the net position between you and the company at any point in time.
When Does It Become a Problem?
A DLA only becomes a tax issue when it's overdrawn — meaning you owe the company money. If the company owes you, there's no tax problem at all (though you may want to extract that money at some point).
An overdrawn DLA — where you've taken more money out of the company than you've put in, beyond salary and dividends — creates two potential tax consequences:
1. Section 455 Tax (Corporation Tax Charge)
If your DLA is overdrawn at the end of the company's accounting period and you haven't repaid the loan within 9 months of the accounting period end, the company must pay Section 455 tax at 33.75% of the outstanding balance. This is effectively a penalty tax to discourage directors from using the company as a personal piggy bank. The good news is that it's refundable — when you eventually repay the loan, the company can reclaim the Section 455 tax. But the cash flow impact can be significant.
2. Benefit in Kind (Personal Tax Charge)
If your overdrawn DLA exceeds £10,000 at any point during the tax year and the company isn't charging you interest (or is charging below the official rate, currently 2.25%), HMRC treats the interest-free loan as a benefit in kind. This means the company must report it on form P11D, the company pays Class 1A NI at 13.8% on the benefit, and you pay Income Tax on the benefit through your self-assessment return.
The £10,000 threshold: If your overdrawn DLA stays below £10,000 throughout the entire tax year, you can avoid the benefit-in-kind charge. Some directors carefully manage their DLA to stay below this threshold — but it requires diligent tracking.
How to Manage Your DLA Properly
Repay Before the 9-Month Deadline
The simplest way to avoid Section 455 tax is to repay any overdrawn balance within 9 months of your company's accounting period end. You can do this by making a physical repayment, declaring a dividend to offset the balance (provided there are sufficient distributable profits), or voting yourself a bonus (subject to Income Tax and NI).
Charge Interest at the Official Rate
If you want to keep the loan outstanding and avoid the benefit-in-kind charge, have the company charge you interest at least at HMRC's official rate (currently 2.25%). The interest is taxable income for the company but avoids the more punitive BIK treatment.
Keep Impeccable Records
Track every transaction that affects your DLA — personal expenses paid by the company, company expenses paid personally, cash withdrawals, dividends declared but not yet paid. Your accounting software should handle this automatically, but you need to categorise transactions correctly.
⚠️ Bed and breakfasting warning: HMRC is aware of the tactic where directors repay their DLA just before the deadline, then immediately re-borrow the money. Anti-avoidance rules (known as "bed and breakfasting" rules) mean that if you repay £5,000 or more and then re-borrow £5,000 or more within 30 days, the repayment is treated as if it never happened for Section 455 purposes.
Frequently Asked Questions
Can I write off a director's loan?
The company can write off the loan, but it will be treated as a distribution (similar to a dividend) and you'll owe Income Tax on the amount. The company can also reclaim any Section 455 tax it paid. Get professional advice before writing off a loan.
What if I'm both a director and a shareholder?
The DLA rules apply to you in your capacity as a director (or participator). Being a shareholder doesn't change the tax treatment. However, you can use dividends — declared from distributable profits — to offset an overdrawn DLA.
Does my DLA appear on public accounts?
For small companies filing micro or abridged accounts, the DLA won't be visible in the publicly filed accounts. However, it will appear in your full statutory accounts and your Corporation Tax return.