What Is a Director’s Loan Account (And Why Does It Matter)?
Director’s Loan Accounts (DLAs) can be a helpful financial tool for small business owners, but they can also cause unexpected tax problems if not managed correctly. Whether you’re lending money to your company, withdrawing funds for personal use, or just trying to keep everything straight, it’s important to understand how DLAs work—and the tax rules around them.
In this guide, we’ll break down what a DLA is, how it’s used, what happens if it’s overdrawn, and how to avoid getting caught out by HMRC.
What Is a Director’s Loan Account?
A Director’s Loan Account is a financial record that tracks any money taken out of or put into your company by you as a director—outside of your salary, dividends, or reimbursed expenses.
In accounting terms, it reflects:
- Money the director owes the company (overdrawn DLA) – recorded as a debtor
- Money the company owes the director – recorded as a creditor
Each director should have their own separate loan account in the books. All transactions—like personal withdrawals, loans to the business, or reimbursed business expenses—should be recorded properly and backed up with paperwork, in case HMRC ever reviews your accounts.
Common Ways Directors Use a DLA
- Here are a few common examples of how a Director’s Loan Account is used:
- Borrowing from the company for short-term personal cash flow needs
- Paying business expenses personally and getting reimbursed
- Lending personal funds to the company during start-up or tight cash flow periods
In some cases, directors may charge interest when lending to their own company. If so, a CT61G form must be submitted to HMRC, and the correct tax paid—just like with interest on a bank loan.
We’ve even seen cases where a bank declined a business loan because the director hadn’t invested their own funds first. The bank saw it as a lack of commitment—preferring to lend to those who’ve shown confidence in their own business.
What Happens if a DLA Is Overdrawn?
If you take out more money than you’ve put in—and don’t repay it on time—there are tax consequences.
- Section 455 Tax (Company Pays)
If the loan isn’t repaid within 9 months of your company’s year-end, the company must pay a temporary 33.75% tax on the outstanding amount. This is called a Section 455 charge. The good news? It’s refundable—but only once the loan is fully repaid.
- Benefit in Kind (You Pay)
If the loan is over £10,000 and interest-free (or below HMRC’s official rate), it’s classed as a benefit in kind. That means you’ll need to report it on a P11D, and pay personal income tax. The company also pays Class 1A NICs.
- Bed & Breakfasting Rule
You can’t repay the loan briefly to avoid tax and then re-borrow it. HMRC has an anti-avoidance rule that ignores repayments of £5,000 or more if they’re re-borrowed within 30 days.
If the company owes you money, there’s no tax liability. You can charge interest if you wish, but any interest received is taxable as personal income.
How to Avoid Problems (and Stay HMRC-Compliant)
- Keep accurate records of all transactions using software like Xero, Sage, Kashflow or FreeAgent
- Avoid using company funds for personal expenses without documentation
- Track all payments clearly—even in a spreadsheet—using columns for money in vs. money out (credits and debits)
- Speak to your accountant before writing off or repaying large amounts to avoid unnecessary tax charges
- Remember: loan write-offs are treated as income and may attract both income tax and National Insurance
Bracknell Businesses: Don’t Get Caught Out
At Cubic, we regularly support local directors in reviewing their financial statements—including DLAs. If you’ve got an overdrawn loan account, we can break it down for you: what’s owed, why, and what you can do about it.
We also offer unlimited meeting time with our accountancy packages—so you can get the support you need to stay compliant and plan ahead.
Need Help with Your Director’s Loan Account?
If you’re not sure whether your DLA is overdrawn—or if you just want a second opinion—we’d be happy to help.
📞 Book a free, no-obligation meeting to chat things through.
Call: 07795 425032
Email: gary@cubicaccountants.co.uk
Or use the Contact Us page on our website.