A director’s loan account (DLA) records all financial transactions between a company director and the company that are not salary, dividends or legitimate expense reimbursements. Every UK limited company with a director who puts money into or takes money out of the business has a director’s loan account, whether they realise it or not.
How a DLA Works
The DLA is a running balance in the company’s books. It can be in credit (the director has lent money to the company) or overdrawn (the director owes money to the company).
| Transaction | Effect on DLA |
|---|---|
| Director puts personal funds into the company | Credit (company owes the director) |
| Director pays business expenses personally | Credit |
| Director withdraws cash not classified as salary or dividends | Debit (director owes the company) |
| Director uses company funds for personal purchases | Debit |
| Salary or dividends declared | Clears debit balance |
A DLA in credit is straightforward: the company owes the director money and can repay it at any time without tax consequences.
An overdrawn DLA is where the tax problems begin.
Tax on an Overdrawn DLA
When a director owes money to the company at the end of the corporation tax accounting period, two separate tax charges may apply.
Section 455 Tax
Under Section 455 of the Corporation Tax Act 2010, the company may have to pay a tax charge on a loan that is not repaid within nine months and one day after the end of the accounting period. The rate equals the dividend upper rate in force when the loan was made, so it changes whenever the government changes dividend tax.
| Company year end | Repayment deadline | Section 455 tax due |
|---|---|---|
| 31 March | 1 January following year | 1 January following year |
| 31 December | 1 October following year | 1 October following year |
Section 455 is a company charge intended to prevent shareholders extracting value as long-running loans instead of taxable distributions.
Relief from Section 455 tax is available after the loan is repaid, released or written off, subject to the timing and anti-avoidance rules. The repayment is not immediate: relief generally cannot be obtained until nine months and one day after the end of the accounting period in which the repayment or other relief event occurs.
Benefit-in-Kind
If the overdrawn balance exceeds GBP 10,000 at any point during the tax year and the director pays no interest, or interest below the HMRC official rate, the director may receive a benefit-in-kind. HMRC sets the official rate and publishes the current figure on GOV.UK.
The benefit is calculated as:
Benefit = Loan balance x HMRC official rate - any interest actually paid
This benefit must be reported on the director’s P11D and triggers:
- Income Tax for the director on the benefit amount
- Class 1A National Insurance for the company, at the employer rate
If the loan balance stays below GBP 10,000 throughout the tax year, no benefit-in-kind arises.
How to Clear an Overdrawn DLA
There are several ways to bring the DLA back into balance before the Section 455 deadline.
1. Repay the Loan
The simplest option: transfer personal funds back to the company. This avoids all tax charges provided it is done before the nine-month deadline.
2. Declare Dividends
Vote a dividend and offset it against the DLA balance. The dividend must come from distributable reserves and is taxed as dividend income in the director’s hands.
3. Vote a Bonus or Additional Salary
Declare a bonus and use it to clear the DLA. The bonus is subject to income tax and National Insurance (both employee and employer), so this is usually the most expensive option.
4. Write Off the Loan
The company can write off the loan, but the written-off amount is treated as a distribution (like a dividend) for tax purposes. The director pays income tax on the amount and the company pays Class 1A NIC.
| Clearance method | Income Tax | National Insurance | Corporation Tax relief |
|---|---|---|---|
| Repay in cash | None | None | None |
| Dividend offset | Dividend tax rates | None | None |
| Bonus/salary | Income Tax at the director’s marginal rate | Employee + Employer NIC | Yes (salary is deductible) |
| Write off | Dividend tax rates | Class 1 NIC | No |
Bed and Breakfasting Rules
HMRC has anti-avoidance rules to stop directors from repaying a loan just before the deadline and then borrowing the same amount again straight after. Under the bed and breakfasting provisions:
- If a director repays GBP 5,000 or more of the loan and then borrows GBP 5,000 or more within 30 days, the repayment is treated as if it never happened
- The Section 455 charge applies to the lower of the amount repaid and the amount re-borrowed
This means you cannot simply cycle money in and out of the company around the year end to avoid the tax charge.
DLA and Company Accounts
The director’s loan account must be disclosed in the company’s annual accounts. Under FRS 102 (and FRS 105 for micro-entities), loans to directors are a related-party transaction and require disclosure in the notes to the company accounts.
For companies filing at Companies House, the balance must be shown even in abbreviated accounts.
Practical Tips
- Track the DLA in real time rather than reconstructing it at year end. Your accounting software should maintain a dedicated nominal code for the director’s loan account.
- Never let the balance drift without a plan to clear it. Section 455 tax at the dividend upper rate is a steep cash-flow cost for an unplanned loan.
- Keep personal expenses separate from business spending. Every personal purchase on the company card increases the DLA debit balance.
- Plan dividend timing to offset DLA borrowings before the nine-month deadline. This is the most common and tax-efficient clearance method for profitable companies.
- Document everything. Board minutes for dividends, loan agreements for formal arrangements, and clear records of every transaction through the DLA.
A well-managed director’s loan account is a normal part of running a small limited company. The problems arise when the balance grows unchecked and the tax deadlines pass without a clearance plan. Regular monitoring and timely action keep the costs to zero.