If you run a limited company in the UK, sooner or later you’ll take money out of the business that isn’t a salary and isn’t a dividend. It might be a quick top-up before payday, a director paying a personal bill from the company card, or a bigger sum drawn against future profits. Every one of those movements sits in what HMRC and your accountant call a director’s loan account — and getting it wrong is one of the most common (and expensive) mistakes limited company directors make.

Used well, a director’s loan account (often shortened to DLA) is a perfectly legitimate part of running a company. Used carelessly, it can trigger extra Corporation Tax charges, Income Tax and National Insurance liabilities, and awkward conversations with HMRC.

This guide explains, in plain English, what a director’s loan account actually is, the rules that apply, the tax you might have to pay, and how to repay it cleanly — so you can use your DLA with confidence and stay on the right side of HMRC.

1. What Is a Director’s Loan Account?

A director’s loan account is simply a record in your company’s books of any money that moves between you (as a director) and the company, outside of your normal salary, dividends, expenses and benefits. It’s not a bank account — it’s a ledger account tracked by your accountant or bookkeeping software.

Money You Take Out vs Money You Put In

• Overdrawn DLA: you’ve taken more money out of the company than you’ve put in, or than the company owes you (in salary, expenses or dividends). The company is effectively lending you money.
• Credit DLA: you’ve put more money into the company than you’ve taken out (for example paying company costs from your personal account). The company owes you money.

Common Reasons a DLA Becomes Overdrawn

• Taking regular drawings from the company without declaring them as salary or dividends
• Using the company debit card or bank account for personal spending
• Declaring a dividend without enough retained profit to legally cover it
• Cash withdrawals that never get properly categorised

Recommended action: Ask your accountant for your DLA balance at least once a quarter, not just at year end. Small habits build up quickly, and knowing where you stand keeps tax bills predictable.

2. The Tax Rules Every UK Director Needs to Know

An overdrawn director’s loan account isn’t illegal, but it comes with rules. HMRC treats a loan from your company to you very differently from a salary or a dividend, and there are three main tax risks to be aware of.

Section 455 Corporation Tax

If your director’s loan account is still overdrawn nine months and one day after your company’s year end, the company has to pay a temporary Corporation Tax charge on the outstanding balance under Section 455 of the Corporation Tax Act 2010 (often called “s455 tax”).

The current s455 rate is 33.75% of the outstanding loan (aligned with the higher dividend tax rate). The good news: this tax is refundable to the company once the loan is repaid — but you have to wait until nine months after the end of the accounting period in which the repayment happened. In cash flow terms, an unpaid DLA can tie up serious money for well over a year.

Benefit in Kind on Loans Over £10,000

If your overdrawn DLA exceeds £10,000 at any point in the tax year, HMRC treats it as a beneficial loan. Unless you’re paying interest to the company at HMRC’s official rate, you’ll have a benefit in kind to report on a P11D. That means:

• Extra Income Tax for you personally (at your marginal rate)
• Class 1A National Insurance for the company (currently 15%)

You can avoid this by keeping the balance under £10,000, or by charging yourself interest at (or above) HMRC’s official rate.

“Bed and Breakfasting” Rules

HMRC anticipated directors repaying a loan just before the nine-month deadline and then borrowing the same money back a few days later. Under the “bed and breakfasting” rules, if £5,000 or more is repaid and then a similar amount is re-borrowed within 30 days, HMRC will treat the repayment as if it never happened for s455 purposes. The same principle applies to loans of £15,000+ with a clear intention to re-borrow.

Recommended action: Never let your DLA drift into the £10,000+ zone by accident. If a bigger loan is genuinely needed, plan the interest, the paperwork and the repayment schedule with your accountant before the money moves.

3. How to Repay a Director’s Loan (The Right Way)

There are essentially four ways to clear an overdrawn director’s loan account. Each has different tax and cash-flow consequences, so it’s worth understanding all four before deciding.

Option 1: Repay in Cash

The cleanest option: pay the money back from your personal account into the company bank account before the nine-month s455 deadline. No extra tax charge, no benefit in kind, no complications.

Option 2: Clear the Loan With a Dividend

If your company has enough retained profits after Corporation Tax, you can declare a dividend and use it to clear the loan. You’ll pay dividend tax personally at your marginal rate, but you avoid the s455 charge on the company. The dividend must be properly declared with board minutes and a dividend voucher, and there must be sufficient distributable reserves — declaring an “illegal dividend” from a company without the profit to support it can cause serious problems later.

Option 3: Clear the Loan With a Bonus or Salary

You can vote yourself a bonus and offset it against the DLA. This attracts Income Tax and both employee and employer National Insurance, which is normally more expensive than dividends. It’s only usually sensible when there aren’t enough profits for a dividend.

Option 4: Write Off the Loan

The company can formally write off the loan, but HMRC treats the written-off amount as earnings for you personally — so it’s taxed like a dividend (Income Tax) and often triggers Class 1 NIC too. Writing off a loan should almost always be a last resort, and never done without accountant advice.

Good DLA Housekeeping

• Use a dedicated business bank account and stop mixing personal spending with company cards
• Run bookkeeping in Xero or QuickBooks so your DLA balance is visible in real time
• Only declare dividends after checking the company has sufficient distributable profits
• If you must take a larger loan, document it with a written loan agreement, an interest rate at or above HMRC’s official rate, and a clear repayment schedule

Recommended action: Talk to your accountant before the year end — not months after — so any overdrawn DLA can be cleared strategically, not in a panic.

4. Common Mistakes That Cost Directors Money

Most of the DLA problems we see in our Blackburn practice come down to the same handful of mistakes. Avoiding them is much cheaper than fixing them.

• Treating the company bank account as personal: Every personal purchase on a company card without a matching salary, dividend or repayment quietly grows your DLA.
• Declaring dividends without checking profits: If retained profits don’t cover the dividend, HMRC can reclassify it as a director’s loan, potentially triggering s455 tax.
• Ignoring the £10,000 benefit-in-kind trigger: Crossing this line even briefly means P11D reporting and Class 1A NIC.
• Missing the nine-month s455 deadline: A 33.75% Corporation Tax charge on the outstanding balance is not a small surprise.
• “Bed and breakfasting” the balance: Repaying and re-borrowing within 30 days doesn’t fool HMRC — the anti-avoidance rules apply.

A DLA is a useful tool, not a personal overdraft. Used deliberately, with proper paperwork and timely repayments, it gives you flexibility. Used carelessly, it becomes one of the most expensive lines in your tax return.

Final Thoughts

A director’s loan account isn’t something to fear — it’s just an accounting record of the money moving between you and your limited company outside salary and dividends. The key is knowing where it sits at any point in the year, understanding the s455 nine-month deadline, staying under (or properly managing) the £10,000 benefit-in-kind threshold, and repaying cleanly with cash or dividends before HMRC gets involved. Get those basics right and your DLA quietly does its job in the background.

If you’re a limited company director in the UK and you’re not 100% sure where your DLA stands — or you know it’s overdrawn and you want a plan to clear it tax-efficiently before your year end — our Blackburn team can help.

Use this link to book a free, no-obligation meeting.

Frequently Asked Questions

What is a director’s loan account?

It is the running balance of money owed between a limited company and its director. When you take money out other than salary, dividends or expense reimbursement, it is a director’s loan; when you put money in, the company owes you.

What is section 455 tax?

If your director’s loan is over £10,000 and not repaid within 9 months and 1 day of the company’s year end, the company pays s455 Corporation Tax at 33.75% of the outstanding balance. It is refundable once you repay the loan.

How do I avoid the s455 charge?

Repay the overdrawn balance within 9 months of year end — from personal funds, by voting a dividend, or by processing a bonus through payroll. Do not bed-and-breakfast the loan (repay then re-borrow within 30 days); HMRC blocks this.

Are director’s loans reported to HMRC?

Yes. An overdrawn loan over £10,000 at year end must be reported on the CT600, and on your P11D as a benefit in kind unless interest at HMRC’s official rate (2.25% in 2026) is charged.