Director’s Loan Account: What you need to know.

“Borrowing from Your Business? Here’s What HMRC Wants You to Understand”

Introduction: Why You Need to Understand Your Director’s Loan Account

As a small business owner and company director, I know how easy it can be to treat your business bank account like your own personal wallet, especially when you’re juggling cash flow, tax bills, and day-to-day pressures. But here’s the truth: what you take out of the company that isn’t salary, dividends, or reimbursed expenses is classified as a Director’s Loan, and if you don’t manage it properly, it can come back to bite you — hard.

I’ve seen it time and again. A director dips into company funds to pay for a family holiday, cover a tax bill, or bridge a short-term personal cash gap, assuming they’ll sort it out later. But months go by, and they forget, or worse, the company can’t afford to pay a dividend. Then come year-end, they’re looking at a Section 455 tax charge of 33.75% on the overdrawn balance if it’s not repaid within 9 months. 

And this isn’t just hypothetical — I worked with a client recently who had unknowingly borrowed over £20,000 from the company. When the accountant flagged it during the year-end review, they were shocked to find they owed the company (and HMRC) far more than they realised.

Worse still, if your business goes into liquidation, the director becomes personally liable to repay any outstanding director’s loan. Liquidators are legally required to recover these funds to pay creditors, and they won’t hesitate to pursue directors directly.

That’s why understanding your Director’s Loan Account (DLA) is absolutely critical. It’s not just a line in your accounts — it’s a legal obligation. HMRC and Companies House have clear rules on how these loans must be reported, repaid, and taxed.

In this blog, I’ll walk you through what a DLA is, how it works, the tax implications, what to do if your company becomes insolvent, and how to keep yourself out of trouble. Because managing your Director’s Loan Account isn’t just good accounting — it’s good business.

1: What is a Director’s Loan Account?

A Director’s Loan Account (DLA) is essentially a record in your company’s books that tracks money you, as a director, either lend to or borrow from your limited company. It’s separate from your salary, dividends, or reimbursed expenses, and it’s important to understand the difference.

If you take more money out of the company than you’ve put in (and it’s not declared as salary or dividend), that amount is classed as a director’s loan. Conversely, if you put personal money into the company to help with cash flow or cover costs, the company owes you, and that also goes through the Director’s Loan Account, but as a credit.

Here’s how it works in practice:

• You pay for company expenses out of your personal account — the DLA shows the company owes you.
• You withdraw money from the company for personal use — the DLA shows you owe the company.
• You lend the company money to help with short-term funding — again, the DLA tracks this.

The Director’s Loan Account is a legal and reportable element of your company’s financial records. If you owe the company money at your financial year-end, and you don’t repay it within 9 months and 1 day, HMRC charges the company a Section 455 tax at 33.75% of the outstanding amount (as of 2024). This is designed to stop directors from using their company like an interest-free overdraft.

This account also comes under scrutiny during insolvency. If your company goes into liquidation and you have an overdrawn DLA, the liquidator can demand repayment — and if the company has creditors to pay, they will pursue you personally for the balance.

Put simply, your Director’s Loan Account is a critical financial tool — and a potential liability if not carefully managed.

Next up, let’s look at what counts as a director’s loan — and what doesn’t.

2: What Counts as a Director’s Loan (and What Doesn’t).

Not every transaction between you and your company is considered a director’s loan. It’s important to understand what does and doesn’t fall under this category to avoid accidentally creating an overdrawn Director’s Loan Account (DLA).

What Counts as a Director’s Loan:

1. Withdrawing money that isn’t salary or dividend
   If you take money out of your company and it hasn’t been processed through payroll or issued as a formal dividend, it’s likely to be a director’s loan.
2. Using company money for personal expenses
   Paying for personal holidays, shopping, or home improvements with company funds creates a loan, even if you intend to pay it back later.
3. Borrowing short-term from the business
   If cash flow is tight personally and you “borrow” from the business, that amount is treated as a loan until repaid.
4. Delays in dividend paperwork
   Even if a dividend is agreed in principle, if the correct documentation isn’t completed at the time of withdrawal, HMRC may treat it as a loan.

What Doesn’t Count as a Director’s Loan:

1. Salary and PAYE Income
   Wages paid through payroll, taxed via PAYE and National Insurance, are not loans — they’re employment income.
2. Properly declared dividends
   As long as the company has sufficient retained profits and board minutes declaring the dividend, this is not a loan.
3. Reimbursed business expenses
   If you’ve used your own money to pay for legitimate business expenses (e.g. travel, office supplies), reclaiming them is not a loan — it’s reimbursement.
4. Personal funds introduced into the company
   If you pay company bills from your own bank account or inject working capital, that amount is treated as the company owing you, not the other way around.

Getting this distinction wrong can have serious tax and legal consequences, especially if the company ends up in financial trouble. Treat every withdrawal or payment with care and always record it properly in your company’s books.

3: How to Manage Your Director’s Loan Account Properly.

If you’re a company director, your Director’s Loan Account (DLA) isn’t just a side note in your bookkeeping — it’s a live financial record that needs active management. Mismanaging it can trigger unnecessary tax liabilities, cash flow problems, or even personal financial risk. The good news? With clear systems and discipline, managing your DLA can be straightforward.

3.1. Keep Detailed, Timely Records.

Make sure all transactions between you and the company are properly documented. This includes:

• Dates and amounts of money withdrawn from or paid into the business.
• Clear descriptions of each transaction (e.g. salary, expense reimbursement, loan repayment).
• Supporting documentation, such as board minutes for dividends or expense receipts.

Using cloud accounting software like Xero or QuickBooks helps automate and track this, reducing the chance of missed entries.

3.2. Separate Personal and Business Transactions.

Avoid using the company account for personal expenses, even if you intend to repay the money quickly. Mixing funds creates confusion and increases the likelihood of triggering an overdrawn loan unintentionally. Keep it clean — treat your business account like it belongs to someone else.

3.3. Monitor the Running Balance Regularly

Don’t wait until year-end to find out you’ve got a problem. Review your DLA at least monthly to make sure:

• You haven’t inadvertently taken more than you’ve put in.
• Any loans are repaid within 9 months of the company’s year-end (to avoid the s455 Corporation Tax charge).
• You stay within limits for tax-free lending (£10,000 or less, or you risk a Benefit in Kind charge).

3.4. Work with Your Accountant.

Your accountant should help you reconcile your DLA and alert you to issues early. A good accountant won’t just record the numbers — they’ll advise you on timing dividends, repaying loans, and minimising tax.

Keeping your Director’s Loan Account in check isn’t just about compliance — it’s about protecting your company and yourself. Up next, we’ll look at what happens if your DLA becomes overdrawn — and why HMRC keeps a close eye on it.

4: What Happens if Your Director’s Loan Account is Overdrawn

An overdrawn Director’s Loan Account (DLA) might seem like “borrowing from yourself” — but from a legal and tax perspective, HMRC sees things very differently.

4.1. The 9-Month Rule and Section 455 Tax

If your DLA is overdrawn at the company’s year-end and not repaid within 9 months, your company must pay Section 455 Corporation Tax on the outstanding amount.

• The tax rate is currently 33.75% (as of 2024/25), matching the higher dividend tax rate.
• This isn’t a permanent tax — if the loan is repaid later, you can reclaim the tax. But the repayment delay can span several years, tying up cash flow.
• HMRC only repays this tax 9 months and 1 day after the end of the accounting period in which the loan was repaid, so repayments made now don’t result in immediate relief.

4.2. Interest-Free Loans Over £10,000

If your DLA exceeds £10,000 at any point during the year and you haven’t paid interest at HMRC’s official rate (currently 2.25%), it’s treated as a Benefit in Kind:

• You’ll pay personal income tax on the benefit.
• Your company must pay Class 1A National Insurance on the value of the benefit.

This is why borrowing more than £10k from your company — even temporarily — requires planning and advice.

4.3. Write-offs Aren’t a Tax-Free Solution

Writing off a director’s loan isn’t a loophole. If your company decides to “forgive” your overdrawn loan:

• The amount written off is treated as income and taxed like a dividend.
• It must also be disclosed on your personal tax return.

In short, you’ll still pay tax, just through a different route.

4.4. The Impact on Your Company’s Financial Health

An overdrawn DLA weakens your balance sheet and can limit your ability to secure funding, attract investors, or even sell the business. Lenders and buyers often view a persistent overdrawn DLA as a red flag for poor financial discipline.

Being overdrawn isn’t illegal, but it is costly and scrutinised. In the next section, we’ll explore what happens to your DLA if your company runs into serious trouble — and how directors can face personal consequences.

5: What Happens to a Director’s Loan Account if the Business Goes into Liquidation or Receivership?

If your company faces insolvency — whether through liquidation, administration, or receivership — the status of your Director’s Loan Account (DLA) becomes a serious legal and financial matter. Many directors assume they’re protected behind the corporate veil. However, if your DLA is overdrawn, that veil can be pierced — and you may become personally liable.

5.1. DLAs Are Treated as Company Assets

When a company enters liquidation or administration, the appointed Insolvency Practitioner (IP) is legally required to realise the company’s assets to repay creditors. An overdrawn DLA is treated as one such asset, meaning:

• The IP will pursue the director personally to repay the loan.
• You could be taken to court if you refuse or are unable to repay.
• Repayment may be demanded in full, not in instalments.

It doesn’t matter that you’re the one who originally loaned money to or invested in the business — if you borrowed from the company, the debt is now owed back to the company.

5.2. No Right to Set-Off Against Salary or Dividends.

Some directors assume they can offset an overdrawn loan against unpaid salary or dividends. Unfortunately, in most insolvency cases:

• Unpaid salaries become unsecured claims, ranking behind secured creditors.
• Future dividends cannot be issued, as the company is no longer a going concern.

This means that even if you “planned” to cover the loan with future earnings, that opportunity is lost once insolvency proceedings begin.

5.3. Personal Financial Risk

If you cannot repay the overdrawn DLA:

• You may face legal action from the liquidator.

• Your personal assets could be at risk, including your home, especially if the loan is substantial.

While a limited company structure generally protects personal assets, an overdrawn DLA creates a direct financial obligation that transcends that protection.

5.4. HMRC Scrutiny

HMRC closely examines DLAs during insolvency proceedings to ensure directors haven’t extracted value improperly from the business. If they believe the loan was taken recklessly or while the company was already insolvent, they may:

• Seek to hold the director personally liable for wrongful trading.
• Pursue action under the Insolvency Act 1986.

In short: when a business goes under, your DLA becomes a liability, not a footnote. If your loan account is overdrawn, liquidation can turn a business failure into a personal financial crisis. That’s why it’s vital to keep this account in order and seek advice before drawing funds.

6: Best Practices for Managing Your Director’s Loan Account.

A Director’s Loan Account (DLA) can be a useful tool when managed properly, but it’s also one of the most commonly misunderstood areas in small company finance. Missteps here can lead to tax charges, penalties, or even personal liability. The good news? With a few key habits and some solid advice, you can keep your DLA clean, compliant, and worry-free.

6.1. Understand What Counts as a Loan.

Start by recognising when you’re using company money for personal use. It’s not always obvious. Taking money out of the business that isn’t salary, a dividend, or a repayment of a legitimate expense is usually treated as a loan — and must be recorded as such.

This includes:

• Personal spending using a company card.
• Drawing funds when there are insufficient retained profits for dividends.
• Using company funds to pay personal bills

If in doubt, treat it as a loan until confirmed otherwise.

6.2. Maintain Accurate, Up-to-Date Records.

Keep your DLA records updated in real time, not months later at year-end. Ensure:

• Every transaction is coded correctly in your bookkeeping system
• There’s a clear audit trail for repayments, expenses, and withdrawals
• You reconcile your DLA monthly, just like you would your bank accounts

This makes it easier to spot problems early and avoid surprises at the year-end accounts.

6.3. Repay Overdrawn Balances Promptly

If you do overdraw the account, try to repay it within nine months and one day of your company’s year-end. This avoids the Section 455 tax charge (currently 33.75%) on unpaid director loans.

You can repay with:

• Personal funds
• Dividends (if the company has sufficient retained profits)
• Salary (within PAYE rules)

Do not repay and redraw the same loan in a “bed and breakfast” fashion — HMRC has anti-avoidance rules for this (30-day rule and arrangements rule).

6.4. Avoid Using the DLA as an Interest-Free Piggy Bank.

The company’s money isn’t your money — even if you’re the only shareholder. Treating your business as a personal cash machine is a fast way to lose financial control, trigger penalties, and attract unwanted attention from HMRC.

If you regularly need cash from the business, speak to your accountant about:

• Formalising a loan agreement
• Reviewing your salary/dividend strategy
• Putting in place proper documentation

6.5. Work with an Experienced Accountant.

An accountant who understands director finance — especially for owner-managed businesses — is invaluable. They can:

• Help you avoid unintentional overdrawn balances
• Structure repayments in the most tax-efficient way
• Flag red flags long before they become real problems

They’ll also help ensure your DLA is correctly reflected in your annual accounts, minimising the risk of HMRC scrutiny or misstatements.

In summary: treat your DLA with the same care and diligence as you would any other financial obligation. Clear records, regular reviews, and professional advice are the cornerstones of keeping this account working for you — not against you.