For many owner-managed businesses, the Director’s Loan Account (DLA) is one of the most commonly used yet most misunderstood parts of the company’s finances.
Used well, it can offer flexibility and convenience. Used badly, it can trigger unexpected tax charges, increased scrutiny from HM Revenue & Customs (HMRC), and cash‑flow issues for both the director and the company.
This blog explains what a Director’s Loan Account is, how it works, the tax consequences involved, and why caution is essential when using a company to cover personal expenditure.
What Is a Director’s Loan Account?
A Director’s Loan Account records money moving between a company and its director that is not salary, dividends, expenses, or reimbursement.
In simple terms:
- If you lend money to the company, the company owes you — that results in a credit balance on the DLA.
- If you take money from the company personally, and it is not salary or dividends, you owe the company, which creates an overdrawn DLA.
The Director’s Loan Account tracks these balances over time. It is important to track balances within your bookkeeping system, as it provides a view at a single point in time.
Common Reasons Director’s Loan Accounts Become Overdrawn
Many DLAs don’t become overdrawn intentionally. It often happens gradually, through:
- Paying personal bills via the company
- Using the company card for non‑business expenses
- Drawing funds while waiting for dividends to be declared
- Taking money when cash is available, without tax planning
- Covering short‑term personal cash‑flow gaps
While this may feel convenient, HMRC views these transactions differently. If this sounds familiar, it’s important to be mindful of the transaction moving forward, not least because HMRC are getting more interested.
HMRC’s View on Director’s Loan Accounts
HMRC considers money taken by a director from a company outside salary or dividends to be a loan. Remember you may see the Company and yourself as the same business but this is not the legal view and definitely not HMRC’s view.
If the loan is not properly controlled or repaid, HMRC sees it as:
- a potential benefit in kind,
- a route to unpaid tax, or
- a way of disguising income.
This is why Director’s Loan Accounts attract specific tax rules and reporting requirements.
However, the government believes that HMRC is not receiving the full picture of the transactions between a company and its directors. Therefore, HMRC has published a consultation document seeking views on new reporting requirements.
The consultation is open until 10 June 2026. You can express your views.
Tax Consequences of an Overdrawn Director’s Loan Account
Corporation Tax Charge Under Section 455
If a director owes money to the company and the balance is not repaid within 9 months and 1 day after the company’s year‑end, the company must pay a special corporation tax charge under Section 455.
- The charge is currently 35.75% (increased by 2% last month) of the overdrawn balance.
- This is not a permanent tax, but a temporary charge.
- The tax can be reclaimed only once the loan is repaid.
However:
- The refund often arrives long after the cash has left the business.
- In the meantime, the company’s cash flow suffers.
Benefit in Kind and P11D Reporting
If a director owes the company more than £10,000 at any point during the tax year, interest must be charged at HMRC’s official rate, or else a benefit in kind arises.
If no interest or too little interest is charged:
- The director is taxed personally on the benefit.
- The benefit must be reported on a P11D.
- The company may also face Class 1A National Insurance on the benefit.
This applies even if the loan fluctuates and is only briefly over £10,000.
We are in the middle of the P11D season and last year’s benefits, including interest on DLA’s must be reported by 6th July and tax (class 1A NIC) paid by that date too.
If you think you are impacted by this, get in touch with your normal manager if we are acting for you or speak to your accountant.
Here’s also more information on Myers Clark and how we can help you.
Paying Personal Bills Through the Company: The Reality
Many directors use company funds to pay personal expenses with the intention of “sorting it out later.”
While understandable, the risks include:
- higher tax bills than expected,
- losing track of how much is owed,
- unexpected Section 455 charges,
- incorrect accounts,
- strained company cash flow.
From HMRC’s perspective, regular personal use of company funds without proper reporting suggests a lack of separation between personal and business finances a red flag during inspections.
Advantages of Using a Director’s Loan Account
When used carefully and intentionally, a DLA can have benefits:
- Flexibility for short‑term funding
- Ability to repay the company tax‑free when the director is owed money
- Useful for injecting personal funds into a business quickly
- Helpful during startup or extraordinary circumstances
The key is control and planning.
Disadvantages and Risks
The downsides are significant if DLAs are unmanaged:
- Unexpected corporation tax liabilities
- Personal tax charges via benefit‑in‑kind rules
- Increased HMRC attention
- Cash‑flow issues for the business
- Complexity when preparing accounts and tax returns
- Risk of poor governance perceptions
Used casually, DLAs often cost far more than directors expect.
Best Practice for Managing a Director’s Loan Account
To stay compliant and minimise risk:
- Keep personal and business spending clearly separated
- Review the Director’s Loan Account regularly, not just at year‑end
- Declare dividends properly before withdrawing funds
- Charge interest when required
- Aim to clear overdrawn balances promptly
- Seek advice before, not after, taking funds
A Director’s Loan Account should never be an informal overdraft.
Final Thoughts
Director’s Loan Accounts are a powerful tool but one that requires care, discipline, and understanding.
HMRC pays close attention to them because they sit at the crossroads of personal and company finances. What feels like a simple withdrawal can carry significant tax consequences if handled incorrectly.
If you are using a Director’s Loan Account or think you might be it’s worth reviewing the position sooner rather than later. A short conversation and some planning can often prevent unnecessary tax charges and stress down the line.
If you’d like help reviewing your Director’s Loan Account or understanding your options, speak to your accountant before the position becomes expensive to unwind.
If you are working with us and have any questions about the above, please contact your normal manager.
And if you are not working with us here’s more on who we are.