If you run a limited company, understanding your director’s loan account is essential to avoid unexpected tax bills. Here’s how it works.
What Is a Director’s Loan Account?
| Element | Detail |
|---|---|
| Definition | A record of all money between you and your company that isn’t salary, dividends, or expenses |
| Overdrawn DLA (you owe the company) | You’ve taken out more than you’ve put in |
| Credit DLA (company owes you) | You’ve put in more than you’ve taken out |
| Who needs one | Every director of a limited company (even sole director-shareholders) |
| Where it’s recorded | In the company’s accounts — usually managed by your accountant |
Common Transactions on a DLA
Debits (Increasing What You Owe)
| Transaction | Example |
|---|---|
| Personal spending on company card | Using the business card for a personal purchase |
| Cash withdrawals for personal use | Taking cash from the company account |
| Company pays personal bills | Mortgage, personal insurance, utilities |
| Excessive petty cash | Taking cash without receipts |
| Benefit-in-kind items | Company buys you a personal asset |
Credits (Reducing What You Owe)
| Transaction | Example |
|---|---|
| Personal money put into the company | Startup capital, cash injection |
| Salary credited to DLA | Instead of paying to your personal account |
| Dividends credited to DLA | Dividends offset against the loan balance |
| Personal expenses paid with own money | Claiming legitimate business expenses |
| Repaying the loan directly | Transferring personal funds to company account |
Tax Implications of an Overdrawn DLA
Section 455 Tax (Corporation Tax Act 2010)
| Feature | Detail |
|---|---|
| When it applies | DLA is overdrawn at your company’s year-end and not repaid within 9 months and 1 day |
| Tax rate | 33.75% of the outstanding balance (aligned with higher-rate dividend tax) |
| Who pays it | The company (not you personally) |
| When it’s paid | With the corporation tax payment (9 months and 1 day after year-end) |
| Refundable? | Yes — refunded when the loan is repaid (but not until 9 months after the end of the accounting period in which it’s repaid) |
| Example | You owe the company £10,000 at year-end → company pays £3,375 S455 tax → you repay the £10,000 → company gets the £3,375 back (eventually) |
Benefit-in-Kind (BIK) Tax
| Feature | Detail |
|---|---|
| When it applies | DLA is overdrawn by more than £10,000 at any point during the tax year |
| Why | HMRC treats the loan as a taxable benefit (interest-free borrowing) |
| How it’s calculated | Outstanding balance × HMRC official interest rate (currently 2.25%) |
| Example | £20,000 overdrawn for the full year → BIK = £20,000 × 2.25% = £450 |
| Your tax | Income tax on the BIK amount (at your marginal rate) |
| Company’s cost | Class 1A NI at 13.8% on the BIK amount |
| How to avoid it | Pay interest to the company at the official rate (currently 2.25%) |
| Reporting | Reported on form P11D |
If the Loan Is Written Off
| Feature | Detail |
|---|---|
| Tax treatment | Treated as employment income — subject to income tax and NI |
| NI cost | Both employee NI and employer NI apply |
| For a shareholder (not employee) | Treated as a distribution — taxed at dividend rates |
| S455 refund? | Yes — company gets S455 tax back when the loan is written off |
The 9-Month Rule — Key Dates
| Company year-end | S455 deadline (repay by) | S455 payment due | S455 refund available (if repaid) |
|---|---|---|---|
| 31 March 2026 | 1 January 2027 | 1 January 2027 | 9 months after the period-end in which loan is repaid |
| 31 December 2025 | 1 October 2026 | 1 October 2026 | 9 months after the period-end in which loan is repaid |
Bed and Breakfasting Rules
| Feature | Detail |
|---|---|
| What is it | Repaying a DLA before year-end and then re-borrowing shortly after to avoid S455 |
| HMRC’s anti-avoidance rule | If you repay £5,000+ and re-borrow £5,000+ within 30 days, HMRC treats the loan as never having been repaid |
| Example | You owe £20,000. You repay £15,000 on 28 March. You borrow £15,000 on 10 April. HMRC treats the original £20,000 as still outstanding |
| Also applies to | Repayments matched against new loans of £15,000+ made within the same accounting period or within 30 days before/after |
| How to avoid | Don’t repay and re-borrow within 30 days. If you need to borrow again, wait at least 30 days |
Managing Your DLA Properly
| Best practice | Detail |
|---|---|
| Keep records | Document every transaction — personal vs business |
| Separate bank accounts | Use a personal account and business account separately |
| Vote dividends properly | Board minutes, dividend vouchers for each dividend |
| Repay before year-end | Aim to clear (or reduce) the DLA before your company year-end |
| Pay interest | If overdrawn by £10,000+, pay interest at the official rate to avoid BIK |
| Review monthly | Ask your accountant for a monthly DLA statement |
| Don’t use company money for personal spending | The simplest way to avoid DLA problems |
How to Repay a Director’s Loan
| Method | Tax implication |
|---|---|
| Transfer personal money to company | No tax — simply repaying the loan |
| Offset dividends against DLA | Dividend tax applies as normal, but no additional DLA tax |
| Offset salary against DLA | Income tax and NI apply as normal |
| Company writes off the loan | Taxed as employment income (income tax + NI) |
| Declare a bonus and offset | Income tax + NI — then offset against DLA |
When the Company Owes You (Credit DLA)
| Feature | Detail |
|---|---|
| Common situations | You lent money to the company at startup, paid business expenses personally |
| Withdrawing the money | No tax — it’s repayment of your loan |
| Charging interest | You can charge the company interest — it’s a deductible expense for the company |
| Tax on interest | You pay income tax on interest received; company deducts 20% basic rate at source (CT61) |
| Formal loan agreement | Recommended for larger amounts — sets out terms, interest rate, repayment schedule |
Common Mistakes
| Mistake | Consequence |
|---|---|
| Using the company account for personal spending without recording it | Creates an unintended DLA, potential S455 tax |
| Not repaying before the deadline | Company pays 33.75% S455 tax |
| Bed and breakfasting | HMRC ignores the repayment — S455 still due |
| Not paying interest on loans over £10,000 | BIK tax plus employer NI |
| Writing off the loan without considering the tax | Income tax + NI on the full amount |
| Not keeping proper records | Makes it hard to track and defend if HMRC enquires |