The Director Loan Account: What It Is, Why It Matters, and How to Avoid the Tax Traps
The director loan account is one of the most misunderstood items on a UK company's balance sheet. Used correctly, it's a useful tool. Used carelessly, it triggers an unexpected tax bill.
If you run a UK Limited Company and you've ever taken money out before the dividend paperwork was done, transferred cash to your personal account "to sort out later," or paid a personal expense from the company card — you have a director loan account. It's just a question of whether it's been recorded properly.
What a Director Loan Account Is
A Director Loan Account (DLA) is a running ledger between you and your company. Every time you take money from the company that isn't salary or a formally declared dividend, it goes on the DLA as a loan to you. Every time you put personal money into the company — paying expenses yourself, leaving salary unpaid — it goes on the DLA as a loan from you to the company.
The DLA can be in credit (the company owes you) or in debit (you owe the company). The tax treatment depends on which way it sits, and how long it stays there.
When You Owe the Company: The Section 455 Tax Charge
If your DLA is overdrawn — you've taken more from the company than you've formally declared as salary or dividend — and the balance isn't cleared within nine months and one day of the company's accounting year-end, the company pays a Section 455 tax charge.
From April 2022, the S455 rate is 33.75% of the outstanding loan balance — matching the higher dividend rate. This is a temporary charge; the company gets it back when the loan is repaid. But it's a meaningful cashflow hit, and it sits on the company's Corporation Tax return.
Example: your year-end is 31 March 2026. By 1 January 2027, the DLA must be cleared or the company pays S455 on the outstanding balance with its CT payment. If the overdrawn DLA is £30,000, that's £10,125 of CT to find by January on top of any normal CT liability.
How to Clear an Overdrawn DLA
- Formally declare a dividend that covers the balance (requires distributable reserves — you can't declare a dividend out of losses).
- Put the money back in cash.
- Write up salary and process it through payroll (this has PAYE and NI implications).
The most common fix is declaring a dividend retrospectively to match what was drawn. This is legitimate provided the company had sufficient retained profits at the date the dividend is declared, not just at year-end.
The Benefit in Kind Problem
If your DLA is overdrawn by more than £10,000 at any point during the tax year and you're not paying interest to the company at HMRC's official rate (currently 2.25% for 2025/26), HMRC treats the interest foregone as a benefit in kind. That means:
- The benefit is reported on a P11D
- You pay income tax on it personally
- The company pays Class 1A NI at 13.8% on the benefit
For a £25,000 overdrawn DLA, the benefit in kind is £562.50 (2.25% × £25,000). Not catastrophic, but a compliance headache that most small company owners would rather avoid.
When the Company Owes You: the Credit DLA
If you've paid company expenses personally, or left salary unpaid in the company, the DLA is in credit — the company owes you. You can draw this back at any time, with no tax consequence. It's not income; it's repayment of a loan.
This is actually a useful planning tool. If you leave salary in the company as a credit DLA, you can draw it down in a future year when your personal income is lower — potentially at a lower tax rate.
Three Practical Points
Get it on the balance sheet properly. A DLA that your accountant doesn't know about is a compliance problem. Make sure every non-salary, non-dividend withdrawal is recorded.
Review the position before your year-end, not after. If the DLA is overdrawn two months before year-end, you have options. After year-end, the nine-month clock is already running.
Don't use the company account as a personal current account. The temptation is real when you're the only director and the money all feels like yours. Legally it isn't — the company is a separate entity — and muddling the two creates both tax risk and director liability risk.
The DLA is one of the first things a bank, investor or acquirer looks at when assessing a UK small company. A clean DLA with no overdrawn balance is a signal that the business is being run properly.