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DirectorsUpdated 2026-10-19

What is a Director's Loan Account?

Quick Answer

A Director's Loan Account (DLA) tracks money you personally owe to or are owed by your company. It's overdrawn when you owe the company money (borrowed more than you've put in).

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Detailed Explanation

A Director's Loan Account records all transactions between you personally and your company:

Credits to DLA (company owes you)

- Personal funds you've put into the company - Expenses you've paid personally for the business - Salary owed but not yet paid

Debits to DLA (you owe company)

- Money you've withdrawn beyond salary/dividends - Personal expenses paid by company - Company money used for personal purposes

Tax implications of overdrawn DLA

If your DLA is overdrawn at your company's year-end:

1. Section 455 tax

Company pays 35.75% of the overdrawn balance to HMRC (33.75% for loans made before 6 April 2026). This is refundable when you repay the loan.

2. Benefit in Kind

If the loan exceeds £10,000 at any point, you must pay tax on the benefit of an interest-free loan (at the HMRC official rate).

3. Bed and breakfasting rules

You can't repay the loan before year-end and re-borrow within 30 days to avoid S455 tax.

Best practice

Keep your DLA in credit or at zero. If you need cash, declare dividends (if profits allow) rather than taking a loan.

Source: HMRC Director's Loan Account Rules

Real-World Examples

Paying Personal Bills

You use your company credit card to pay for a £500 personal shopping trip. This £500 is a debit to your DLA, meaning you now owe the company £500, which needs to be repaid or accounted for as salary/dividend.

Funding Startup Costs

You personally transfer £2,000 into your company's bank account to cover initial setup costs before the company starts generating revenue. This £2,000 is a credit to your DLA, representing money the company owes you.

Unpaid Salary

Your company owes you £3,000 in unpaid salary at the end of the tax year. This £3,000 is a credit to your DLA. It's important to properly record this, even if not paid, as it can affect your personal tax liability when eventually drawn.

Common Mistakes to Avoid

  • Failing to keep accurate records of all transactions between yourself and the company, leading to discrepancies and potential tax issues.
  • Treating the DLA as a personal piggy bank without considering the tax implications of overdrawing it, especially the Section 455 tax.
  • Not documenting the purpose of each transaction in the DLA, making it difficult to justify expenses if HMRC investigates.
  • Assuming an overdrawn DLA automatically constitutes a taxable benefit-in-kind, overlooking options like repayment or declaring a dividend/salary.

What happens if I can't repay my overdrawn DLA within 9 months and 1 day of the company's year-end?

Section 455 tax is charged on the outstanding amount. This tax is effectively a deposit, which is refunded when the loan is repaid or written off (subject to further tax implications).

Can I 'write off' an overdrawn DLA?

Yes, but writing off an overdrawn DLA is treated as a distribution to you (either salary or dividend) and is subject to income tax and potentially National Insurance contributions, depending on your tax bracket and available dividend allowance.

How does interest apply to a Director's Loan Account?

If you're borrowing a significant amount from your company, HMRC may consider it a beneficial loan and charge you income tax on the 'benefit' of the low or no-interest loan. The official rate of interest is set by HMRC and changes periodically. Check the current rate.

What records should I keep for my DLA?

Keep a running balance of all credits and debits. For each transaction, note the date, amount, and a brief description of what the money was used for (e.g., 'personal expense - shopping', 'director's contribution - startup funds').

Practical Tips

  • Reconcile your DLA regularly, ideally monthly, to identify and correct any errors promptly.
  • Use a separate bank account for personal and business transactions to minimize confusion and simplify record-keeping.
  • Set a repayment plan if your DLA is overdrawn to avoid Section 455 tax; a documented repayment schedule demonstrates intent to repay.
  • Before taking any money from the company beyond your salary, carefully consider whether it should be treated as a dividend, salary, or a loan and the respective tax implications.

Related Questions

How much salary should I pay myself as a director?

Most single-director companies are best paying a salary of £12,570 per year (the personal allowance) and taking the rest as dividends. A £5,000 salary (the employer NI threshold) is too cautious for most directors.

How much dividend can I take from my company?

You can take dividends up to your company's available profits (retained earnings). There's no legal maximum, but you'll pay dividend tax above the £500 dividend allowance.

How does National Insurance work for company directors?

Directors pay NI on earnings above £12,570/year (primary threshold). Rate is 8% on earnings between £12,570 and £50,270, then 2% above. Employers pay 15% on earnings above £5,000.

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