Directors Loan Account (DLA) – Complete Guide for UK Company Directors
As a director of a UK limited company, managing your Director’s Loan Account (DLA) correctly is essential—not just for compliance with HMRC rules, but to protect your financial health and credibility. This guide covers both borrowing from and lending to your company—plus how interest is handled and accurately reported.
What is a Director’s Loan Account?
A Director’s Loan Account (DLA) is a record of money that moves between a director and their limited company, outside of normal salary, dividends, or expense repayments. Think of it as a running balance that keeps track of:
Money you borrow from the company
Money you lend to the company
Repayments in either direction
At any given time, the DLA will either be:
In credit – the company owes you money (because you’ve put in more than you’ve taken out).
Overdrawn – you owe the company money (because you’ve taken more out than you’ve put in).
Maintaining a clear and accurate DLA is a legal requirement, and it ensures compliance with both Companies House and HMRC rules.
When Do You Need a Director’s Loan Account?
A DLA is required whenever there are financial transactions between you and the business that aren’t:
Salary or wages (processed via PAYE)
Dividends (declared from post-tax profits)
Legitimate business expense reimbursements
For example:
Taking out extra cash from the business bank account for personal use
Paying for business expenses personally without reimbursement
Injecting personal savings into the business to support cash flow
All these movements must be tracked in the DLA to keep accurate records.
Borrowing Money From Your Company
When you withdraw money from the business that is not salary, dividend, or an expense repayment, it is treated as a director’s loan.
Key Points to Know:
If your DLA is overdrawn at the end of your company’s financial year, HMRC may apply extra corporation tax under Section 455 CTA 2010.
The current tax charge is 33.75% of the outstanding loan balance.
This tax is repayable once the loan is cleared, but only after the director repays the company.
Benefit-in-Kind Rules
If you borrow more than £10,000 at any point in the year, the loan is treated as a benefit-in-kind:
You must pay income tax on the notional interest.
The company must pay Class 1A National Insurance contributions.
This applies even if you intend to repay the loan later.
Interest on Director’s Loans – Borrowing vs. Lending
Interest treatment depends on whether you’re the borrower or the lender.
Borrowing Money from Your Company
If you withdraw money from the business that is not salary, dividends, or expenses, HMRC considers it a loan from your company to you.
| Scenario | Tax Implication |
|---|---|
| Loan repaid within 9 months of year-end | No Section 455 Corporation Tax due. |
| Loan not repaid within 9 months | 33.75% Section 455 Corporation Tax charge applies (refundable once repaid). |
| Loan exceeds £10,000 | Benefit-in-kind rules apply – director taxed on notional interest at HMRC’s official rate, company pays Class 1A NICs. |
| Company writes off the loan | Amount treated as dividend – subject to dividend tax rates. |
Overdrawn Directors’ Loan Account
If you owe the company money, your DLA is “overdrawn.” This means:
You have effectively borrowed from the company.
If the loan is not repaid within 9 months and 1 day after the company’s year end, the company may have to pay additional Corporation Tax (known as Section 455 Tax).
Tax Implications of Borrowing
Borrowing from your company can trigger several tax obligations:
Section 455 Tax
If the loan remains unpaid after 9 months from the company year-end, the company must pay 33.75% (for close companies) of the outstanding loan as Section 455 Tax.
This tax can later be reclaimed by the company once the loan is repaid, but repayment can take years.
Benefit in Kind (BiK) Tax
If the loan is more than £10,000 at any point during the tax year, HMRC treats it as a benefit in kind.
You, as the director, will pay Income Tax on the benefit, and the company will pay Class 1A National Insurance contributions.
Interest Charged by HMRC
If the company lends money to a director interest-free (or at a rate lower than HMRC’s official rate), HMRC will treat the difference as a taxable benefit.
The official rate of interest is reviewed annually, and directors should either charge interest at or above this rate or accept the benefit-in-kind charge.
Example: Borrowing from Your Company
Suppose your company year-end is 31 March 2025, and you borrow £20,000 on 1 December 2024.
If you repay the loan by 31 December 2025 (9 months and 1 day after year-end), no Section 455 Tax is due.
If the loan remains unpaid, the company must pay 33.75% of £20,000 (£6,750) as Section 455 Tax.
If you do not pay interest on the loan at HMRC’s official rate, you will also be taxed on the benefit-in-kind value.
Lending Money to Your Company
It’s common for directors to put personal funds into their company, particularly in the early stages or when cash flow is tight.
| Scenario | Tax Implication |
|---|---|
| Director lends personal funds to the company | No immediate tax impact – treated as a liability owed by the company. |
| Company repays the loan | No tax – repayment is return of capital. |
| Company pays interest to the director | Interest is taxable income for the director and must be reported on Self Assessment. The company can deduct it as a business expense but must apply basic rate tax deduction (20%) at source and report via CT61. |
Loan from Director to Company
When you put personal money into your company:
Your DLA will show as in credit (the company owes you money).
This is classed as a loan from you to the business.
You can withdraw the money at any time (provided the company has sufficient cash flow).
Tax Implications of Lending to Your Company
When you lend money to your company:
Repayment of the Loan
There is no tax when the company repays the capital of the loan.
It is simply returning money you lent.
Interest on the Loan
You may choose to charge the company interest on the loan.
Any interest you receive is taxable as personal income and must be declared on your Self Assessment tax return.
The company can deduct this interest as a business expense, reducing its Corporation Tax bill.
Example: Lending to Your Company
You lend your company £15,000.
You later decide to charge 5% interest per year.
The company pays you £750 in interest less basic rate tax withheld.
You declare this £750 as income on your tax return.
The company deducts £750 from its profits as a business expense, lowering its Corporation Tax liability.
CT61 has to be filed with basic rate tax deduction 20% x £750 = £150.
HMRC Rules and Deadlines
Section 455 Charge
Applies if the loan is not repaid within 9 months and 1 day of the company’s year-end.
Tax is charged at 33.75% of the outstanding balance.
Reclaimable once the loan is repaid, though repayment may take time.
Avoiding the Charge
Options include:
Repaying the loan in full before the 9-month deadline.
Declaring the withdrawal as a dividend (if sufficient profits exist).
Reclassifying as salary or bonus (subject to PAYE and NIC).
Anti-Avoidance Rules
‘Bed and breakfasting’ rules prevent directors from repaying loans just before year-end and immediately withdrawing them again.
If more than £5,000 is repaid and then another loan is taken within 30 days, the repayment is ignored for tax purposes.
Record-Keeping Requirements
Directors must keep clear, accurate records of all transactions. Best practice includes:
Recording every movement of funds between company and director.
Maintaining a separate account in the bookkeeping system labelled Director’s Loan Account.
Retaining supporting documentation (bank statements, board minutes if required).
Failure to keep accurate records may result in penalties, compliance issues, or difficulties with HMRC enquiries.
Example Scenarios
Example 1 – Overdrawn Loan
A director withdraws £15,000 during the year and repays £5,000 before year-end. The remaining £10,000 is not cleared within 9 months.
Section 455 charge = £3,375 (33.75% of £10,000).
The charge is reclaimable once repaid.
Because the loan exceeded £10,000, it must also be reported as a benefit-in-kind.
Example 2 – Loan to Company With Interest
A director lends £20,000 to their company. The company pays 5% annual interest (£1,000).
The company deducts £200 (20%) tax and pays £800 to the director.
The company submits a CT61 return to HMRC.
The director declares £1,000 interest income on their Self Assessment but may not owe further tax if within their allowance.
Pros and Cons of Using a Director’s Loan
| Pros | Cons |
|---|---|
| Quick access to funds when personal cash flow is tight. | If not repaid on time, HMRC can impose Section 455 Corporation Tax charges. |
| Can be cheaper than taking out personal bank loans or credit cards. | Overdrawn accounts can be seen as poor financial management by lenders or investors. |
| Flexibility in repayments – not tied to a bank’s rigid terms. | Directors may face personal tax charges if benefits in kind (e.g., interest-free loans) arise. |
| Allows directors to support their company by lending funds back if needed. | Complex HMRC reporting requirements; mistakes can be costly. |
| Can be a short-term solution to bridge financial gaps without involving external creditors. | Interest may need to be charged at HMRC’s official rate if loans exceed £10,000. |
Director’s Loan Account and HMRC Rules
HMRC closely monitors directors’ loans to prevent misuse of company funds. Key rules include:
Loans must be properly documented in the company’s accounting records.
Any outstanding loans must be reported on the company’s Corporation Tax return (CT600A).
Benefit-in-kind loans must be reported on form P11D.
Directors must declare any personal tax liabilities through Self Assessment.
Risks of Mismanaging a Director’s Loan Account
Failing to manage your DLA properly can lead to serious consequences:
Double Taxation: If you take money out but can’t declare it as salary or dividends, you may face both Corporation Tax (via Section 455) and personal Income Tax charges.
Cash Flow Strain: If too much is borrowed, the company may not have enough liquidity to meet its obligations.
Compliance Penalties: HMRC can impose penalties for late or incorrect reporting of loans.
Director Disqualification: Repeated misuse of directors’ loans may be considered misconduct.
Best Practices for Managing a Director’s Loan Account
To avoid pitfalls:
Keep Accurate Records
Maintain a clear record of every transaction between you and the company.
Use accounting software (e.g., Xero, QuickBooks, or FreeAgent) to automate tracking.
Plan Withdrawals Carefully
Avoid taking money out of the company unless profits allow for dividends or proper repayment terms are in place.
Charge or Pay Interest Correctly
Ensure any interest on loans is charged at or above HMRC’s official rate (if borrowing).
Declare and deduct interest properly when lending money to the company.
Repay Overdrawn Loans Promptly
Repay within 9 months of year-end to avoid Section 455 Tax.
If not possible, plan for the tax charge in advance.
Seek Professional Advice
Directors’ loans can be complex, especially when combined with dividends and salary planning.
A qualified accountant (like us!) can help minimise tax exposure while staying compliant.
Frequently Asked Questions About Directors’ Loan Accounts
1. Can I write off a director’s loan?
Yes, but if a company writes off a loan to a director, it is treated as income for the director and subject to Income Tax. The company cannot deduct the write-off as an expense.
2. Can multiple directors have loans?
Yes, each director has their own DLA. The company must keep separate records for each.
3. Do I need to pay interest when borrowing from my company?
Not necessarily, but if the loan exceeds £10,000 and no interest (or below HMRC’s official rate) is charged, HMRC will treat the benefit as taxable.
4. Can my company pay me back tax-free?
Yes, repayments of loans you made to your company are not taxable. Only interest received is taxable.
5. What happens if I never repay a director’s loan?
HMRC may treat the outstanding balance as income, and the company could face Section 455 Tax permanently.
Summary
A Director’s Loan Account is a vital part of running a limited company in the UK. It ensures all financial interactions between you and your business are properly tracked and reported.
Key takeaways:
Borrowing from your company can trigger Section 455 Tax and benefit-in-kind charges if not managed correctly.
Lending to your company can help with cash flow, and you may charge interest, which is deductible for the company but taxable for you.
HMRC requires careful reporting of directors’ loans to ensure tax compliance.
Mismanagement can lead to tax penalties, cash flow issues, or even disqualification.
By understanding how DLAs work — and by keeping accurate records — you can use them effectively to support both your personal finances and your company’s growth, while staying fully compliant with HMRC rules.