A director’s loan account (DLA) is a record in a company’s books that tracks all financial transactions between a director and the limited company they control. Any money a director takes from the company that is not salary, dividends, or expense reimbursements is treated as a director’s loan.
The DLA can have a positive balance (the director has lent money to the company) or an overdrawn balance (the director owes money to the company). It is the overdrawn balance that triggers significant tax consequences.
How a Director’s Loan Account Works
The DLA is simply a running ledger. Common entries include:
| Transaction | Effect on DLA |
|---|---|
| Director lends money to the company | Credit (company owes director) |
| Director pays company expenses personally | Credit |
| Company pays money to director (not salary/dividends) | Debit (director owes company) |
| Director uses company card for personal spending | Debit |
| Salary or dividends declared but not yet paid | Credit |
| Repayment by director | Credit |
At any point, the net balance shows whether the director owes the company or vice versa.
When the Director Owes the Company
An overdrawn DLA — where the director has taken more from the company than they have put in — creates several tax and reporting obligations.
Section 455 Tax (Corporation Tax Act 2010)
If a director’s loan remains outstanding 9 months and 1 day after the end of the accounting period, the company may have to pay Section 455 tax. The rate is set to match the dividend upper rate, so it moves whenever that rate changes. The rate that applies is the one in force when the loan was made, and HMRC publishes the current figure on GOV.UK.
Section 455 tax is refundable once the loan is repaid, but the refund is not issued until 9 months after the end of the accounting period in which the loan is cleared.
Example: A company with a 31 March year end advances £20,000 to a director-shareholder in May. If the loan has not been repaid by 1 January after the following year end, the company owes Section 455 tax on the full £20,000. With an illustrative rate of 35%, the charge would be £7,000.
Benefit in Kind
If the overdrawn DLA exceeds £10,000 at any point during the tax year and no interest is charged, or interest is charged below the HMRC official rate, the director may receive a benefit in kind (BIK). HMRC sets the official rate and publishes it on GOV.UK, and it can change during the tax year.
This means:
- The benefit must be reported on the director’s P11D
- The director pays Income Tax on the benefit
- The company pays Class 1A National Insurance on the benefit at the employer rate
The taxable benefit is calculated as the HMRC official rate of interest on the outstanding balance, minus any interest actually paid by the director.
Writing Off a Director’s Loan
If the company decides to write off (forgive) all or part of a director’s loan:
- The amount written off is treated as a dividend for tax purposes if the director is also a shareholder
- The write-off is subject to Income Tax and National Insurance
- The company can claim Corporation Tax relief on the amount written off
- Section 455 tax already paid becomes refundable
Writing off loans is generally less tax-efficient than having the director repay the balance.
When the Company Owes the Director
A credit balance on the DLA means the director has lent money to the company. This is common when:
- A director funds the company from personal savings at startup
- A director receives a Start Up Loan personally and introduces the funds to the company
- A director pays company expenses from their own bank account
The company can repay this at any time without tax consequences for the director, provided it is a genuine repayment and not disguised remuneration. On the company’s balance sheet, it appears as a creditor (liability).
Interest on Director Loans to the Company
If the director charges interest on money they have lent to the company:
- The company gets Corporation Tax relief on the interest paid
- The company must deduct 20% Income Tax at source and pay it to HMRC (form CT61)
- The director declares the gross interest on their self-assessment return
The interest rate must be at a commercial rate to be allowable — HMRC may challenge artificially high rates.
Reporting Requirements
| Requirement | Detail |
|---|---|
| Company accounts | The DLA balance must be disclosed in the notes to the accounts |
| Company Tax Return (CT600) | Overdrawn DLA balances must be reported |
| Section 455 tax | Paid with the Corporation Tax return if the loan is outstanding 9 months after year-end |
| P11D | Benefits in kind from the loan must be reported |
| Self-assessment | The director must report any BIK or interest income |
Managing the Director’s Loan Account
Keeping the DLA in Good Shape
- Track every transaction — Use accounting software to maintain a clear, real-time DLA balance
- Declare dividends properly — Ensure dividends are formally declared before money is withdrawn, so withdrawals reduce a credit balance rather than creating a debit
- Repay within 9 months — Clear any overdrawn balance before the Section 455 deadline
- Keep the balance below £10,000 — Avoids the benefit in kind charge if no interest is being paid
- Document everything — Board minutes for loans, dividend declarations, and expense approvals
Bed and Breakfasting Rules
HMRC introduced anti-avoidance rules to prevent directors from temporarily repaying a loan before the Section 455 deadline and then borrowing again. Under the bed and breakfasting provisions (Section 464A CTA 2010):
- If a director repays £5,000 or more and then takes out a new loan of £5,000 or more within 30 days, the repayment is treated as if it never happened for Section 455 purposes
- This applies whether the repayment and new loan are in the same or different accounting periods
The intention is to prevent directors from cycling money in and out of the DLA to avoid Section 455 tax.
DLA and Business Financing
A director’s loan account is an informal but common method of financing a small company. Compared to other options:
- Unlike a business loan, there are no arrangement fees or external credit checks
- Unlike equity financing, lending via the DLA does not dilute ownership
- The director can charge interest for a tax-efficient return
- Repayment is flexible and can be timed to suit the company’s cash flow
However, relying too heavily on the DLA can create problems if the director needs the money back and the company does not have the cash to repay it.
Common Mistakes
- Not recording transactions — Every withdrawal and personal expense paid by the company must be posted to the DLA
- Treating the company as a personal bank account — HMRC scrutinises DLAs closely, especially in owner-managed companies
- Missing the Section 455 deadline — Failing to repay within 9 months and 1 day triggers an expensive tax charge
- Ignoring the £10,000 threshold — Exceeding this amount without charging interest creates a reportable benefit in kind
- Informal dividends — Taking money without proper dividend declarations leaves the withdrawal as a loan on the DLA