A director’s loan account records money moving between a limited company and its directors when the transactions are not salary, dividends, expense repayments or repayments of money already owed.
The account can show that the director owes money to the company or that the company owes money to the director.
Although using a director’s loan account is legal, poor record-keeping or late repayment can create substantial Corporation Tax, Income Tax and National Insurance liabilities.
Directors must remember that company funds belong to the limited company. They cannot withdraw money as if it were held in a personal bank account.
What Is a Director’s Loan Account?
A director’s loan account, commonly shortened to DLA, is an accounting record rather than a separate physical bank account. It tracks financial transactions between a director and the company.
A transaction may be entered in the director’s loan account when:
- The director lends personal money to the company.
- The director pays business expenses personally.
- The company pays a director’s personal expense.
- The director withdraws money that is not salary or a dividend.
- Salary, bonuses or dividends are credited against an existing balance.
- The company repays money previously lent by the director.
When someone registers a limited company, the company becomes a separate legal entity. Its money must therefore be kept separate from the director’s personal funds.
How Does a Director’s Loan Account Work?
Every transaction changes the balance of the account. Whether the account is in credit or overdrawn determines who owes the money.
| Director’s loan position | What it means | Usual consequence |
| Account in credit | The company owes the director money | The director can usually withdraw the amount without additional tax |
| Account at zero | Neither party owes the other money | No outstanding director’s loan |
| Account overdrawn | The director owes the company money | Repayment and possible tax rules apply |
Accurate small business bookkeeping is essential because several transactions may pass through the account during an accounting year.
What Does an Account in Credit Mean?
An account is in credit when the director has put more money into the company than they have taken out.
For example, a director may invest £15,000 of personal money to help the company meet its initial operating costs. If the company later repays £5,000, the director’s loan account remains £10,000 in credit.
Repayment of the original £10,000 would not normally be treated as salary or a dividend because the company is simply returning money it already owes the director.
What Does an Overdrawn Account Mean?
An account becomes overdrawn when a director takes more from the company than the company owes them.
Suppose a director withdraws £8,000 for personal use without treating it as salary, a dividend or an expense reimbursement. The director’s loan account would normally be overdrawn by £8,000, meaning the director owes £8,000 to the company.
An overdrawn balance is an asset of the company because it has a legal right to recover the money.
What Transactions Should Be Recorded?
A director’s loan account should provide a complete history of money transferred between the company and the director.
Common entries include:
| Transaction | Effect on the account |
| Director lends money to the company | Increases the amount owed to the director |
| Director pays a company bill personally | Increases the amount owed to the director |
| Company repays the director | Reduces the credit balance |
| Director withdraws company money personally | Creates or increases an overdrawn balance |
| Company pays a personal bill for the director | Creates or increases an overdrawn balance |
| Valid dividend credited to the account | May reduce an overdrawn balance |
| Salary or bonus processed through payroll | May reduce an overdrawn balance |
| Director repays money to the company | Reduces the overdrawn balance |
Maintaining a dedicated account from one of the available small business banking options can make it easier to separate business and personal transactions.
Can a Director Take Money From a Limited Company?
A director can receive money from a company, but every payment must have a valid purpose and be recorded correctly.
Money may normally be taken as:
- Salary or a bonus processed through PAYE.
- A lawful dividend supported by distributable profits.
- Repayment of business expenses.
- Repayment of money previously lent to the company.
- A properly recorded director’s loan.
A director’s loan should not be used to disguise salary or dividends. Before declaring a dividend, the company must have sufficient distributable profits and complete the necessary paperwork. A dividend cannot simply be backdated after the director has withdrawn money.
When Does Section 455 Tax Apply?
Section 455 tax can apply when a close company makes a loan to a director or shareholder and the balance remains outstanding nine months and one day after the end of the relevant Corporation Tax accounting period.
Most owner-managed UK limited companies are close companies for these purposes.
For loans made on or after 6 April 2026, the Section 455 tax rate is 35.75%. Loans made between 6 April 2022 and 5 April 2026 were generally subject to a 33.75% rate.
This tax is paid by the company, not personally by the director. However, paying Section 455 tax does not cancel the loan. The director still owes the outstanding amount to the company.
How Is Section 455 Tax Calculated?
Consider a director who takes a £20,000 loan in July 2026. The company’s accounting period ends on 31 March 2027.
The repayment deadline is 1 January 2028, which is nine months and one day after the accounting period ends. If the entire loan is still outstanding on that date, the calculation would be:
| Calculation | Amount |
| Outstanding director’s loan | £20,000 |
| Section 455 tax rate | 35.75% |
| Section 455 tax payable | £7,150 |
The £7,150 is a temporary company tax charge, but it can significantly reduce cash flow. Interest may also be charged if the company pays it late.
Understanding possible tax bills should form part of the company’s wider financial planning. Directors who require regular professional support can compare the typical cost of limited company accounting.
Can the Company Reclaim Section 455 Tax?
The company can normally reclaim Section 455 tax after the loan has been genuinely repaid, released or written off. However, relief is not immediate.
A repayment claim generally cannot be made until nine months and one day after the end of the accounting period in which the loan was repaid, released or written off. The company must normally submit its claim within four years.
Any interest charged because the original Section 455 tax was paid late cannot usually be reclaimed.
Writing off a loan may allow the company to reclaim Section 455 tax, but it can create separate Income Tax and National Insurance consequences. Professional advice should be obtained before choosing this option.
Does the £10,000 Beneficial Loan Rule Apply?
A separate benefit-in-kind issue may arise if the total amount owed by the director exceeds £10,000 at any point during the tax year.
If the company provides the loan interest-free or charges less than the official rate, the director may be taxed on the interest benefit. For the 2026/27 tax year, the official beneficial loan interest rate is 3.75%.
The company will generally need to:
- Calculate the taxable benefit.
- Report it through the appropriate benefits procedure.
- Pay Class 1A National Insurance on the taxable value.
- Maintain evidence of any interest paid by the director.
The Class 1A National Insurance rate for 2026/27 is 15%.
The £10,000 threshold relates to the beneficial loan rules. It is different from the nine-month Section 455 repayment deadline. A loan below £10,000 can still create Section 455 tax if it remains unpaid after the deadline.
Similarly, charging interest may reduce or remove the benefit-in-kind charge, but it does not automatically prevent Section 455 tax.
Does a Director’s Loan Need Shareholder Approval?
Shareholder approval may be required before a company makes a loan to a director where the total value exceeds £10,000. The exact requirements depend on the company’s ownership, articles and circumstances.
In a company where one person is both the sole director and sole shareholder, the approval process may appear straightforward. Nevertheless, the decision should still be properly documented.
Companies with several directors or shareholders should not assume that one director can authorise their own loan. Board minutes, shareholder resolutions and a written loan agreement may be required.
A loan agreement should set out:
- The amount being borrowed.
- The reason for the loan.
- The interest rate.
- The repayment date.
- The repayment schedule.
- What happens if the director leaves the company.
- Any security supporting the loan.
Can a Dividend Clear an Overdrawn Director’s Loan Account?
A company may declare a dividend and credit it to a director’s loan account, but only when the dividend is lawful.
The company must have enough distributable profits, and the director must be entitled to receive the dividend as a shareholder. The company should prepare appropriate board minutes and a dividend voucher.
If the company does not have sufficient distributable profits, the dividend may be unlawful. The attempted dividend may fail to clear the loan, leaving the director responsible for repayment and the company exposed to tax.
Salary or a bonus can also be credited against the balance, but the payment must be processed correctly through payroll, with PAYE and National Insurance considered.
What Are the Bed-and-Breakfasting Rules?
A director cannot always avoid Section 455 tax by briefly repaying a loan and borrowing the money again.
Anti-avoidance rules may apply where repayments totalling £5,000 or more are linked to new loans of £5,000 or more within a 30-day period. The repayment may be matched with the new borrowing, preventing the company from obtaining the expected tax relief.
Further rules can apply when a loan exceeds £15,000 and the director has arranged or intended to borrow further money from the company, even when the new borrowing falls outside the 30-day period.
Repayments should therefore be genuine and permanent. Recycling funds through the company account solely to create the appearance of repayment can create tax and compliance problems.
What Happens When a Director Lends Money to the Company?
A director may use personal savings to support a company’s startup costs or short-term cash flow. The director’s loan account then becomes a creditor balance because the company owes money to the director.
The company can normally repay the original loan without treating the payment as salary or a dividend.
If the director charges interest:
- The interest is normally a business expense for the company, subject to the usual tax rules.
- The interest is personal income for the director.
- The company generally deducts basic-rate Income Tax before paying the interest.
- The deducted tax must be reported and paid using the applicable CT61 procedure.
- The director reports the interest through Self Assessment where required.
The interest rate and repayment terms should be commercially reasonable and documented in a written agreement.
What Happens to the Loan if the Company Becomes Insolvent?
An outstanding director’s loan does not disappear when the company experiences financial difficulty.
If the company enters liquidation, the liquidator will normally treat an overdrawn director’s loan account as money owed to the company. The liquidator may ask the director to repay the full balance and can investigate how the account arose.
The director may face additional scrutiny if:
- Money was withdrawn while the company could not pay its debts.
- Dividends were declared without sufficient profits.
- Company funds were used for personal expenses.
- Records are incomplete or misleading.
- The director continued borrowing when insolvency was likely.
A director who has lent money to an insolvent company becomes a creditor. Whether the money is recovered will depend on the company’s available assets and the priority of other creditors.
How Should a Director’s Loan Account Be Recorded?
The company should maintain a separate loan account for each director. Combining several directors’ transactions in one account can make it difficult to identify who owes what.
Good records should include:
- The date of every transaction.
- The amount paid or withdrawn.
- The reason for the transaction.
- Copies of receipts and invoices.
- Dividend vouchers and board minutes.
- Payroll records for salary or bonuses.
- Loan agreements and shareholder approvals.
- Interest calculations.
- Repayment evidence.
- The running balance after each transaction.
The balance should be reconciled regularly rather than reviewed only when the annual accounts are prepared. Directors should also understand the company’s tax identifiers and know how to find its business UTR before filing returns or contacting HMRC.
What Mistakes Should Directors Avoid?
The most common director’s loan account mistakes include treating company money as personal funds, failing to keep receipts and declaring dividends without checking available profits.
Other risks include:
- Ignoring the account balance: Directors may not realise that regular personal withdrawals have created a large debt.
- Waiting until year-end: A late review leaves little time to arrange a genuine repayment or lawful dividend.
- Confusing expenses with loans: Personal expenses paid by the company must not be recorded as business expenses.
- Backdating documents: Dividends, bonuses and loan agreements should reflect what actually happened.
- Reborrowing immediately: A temporary repayment may be caught by anti-avoidance rules.
- Forgetting benefit reporting: A loan exceeding £10,000 may create a taxable benefit even if it is later repaid.
- Assuming Section 455 clears the debt: The tax charge does not remove the director’s obligation to repay the company.
How Can Directors Manage the Account Effectively?
Directors should review their loan accounts monthly and again before the company’s year-end. A useful process is to:
- Reconcile the account with bank transactions.
- Correctly identify salary, dividends, expenses and loans.
- Check whether the balance has exceeded £10,000.
- Calculate any interest that should be paid.
- Review the nine-month repayment deadline.
- Confirm that proposed dividends are supported by profits.
- Plan for any Section 455 tax liability.
- Ask an accountant to review unusual or substantial transactions.
The account should reflect genuine transactions supported by evidence. It should never be adjusted merely to produce a more favourable year-end balance.
Conclusion
A director’s loan account provides flexibility when money moves between a director and a limited company, but it must be managed carefully. The account should clearly distinguish loans from salary, dividends, expense repayments and personal spending.
An overdrawn balance can trigger Section 455 tax if it remains unpaid nine months and one day after the accounting period. Loans exceeding £10,000 may also create a taxable benefit where insufficient interest is charged.
Regular reconciliation, proper supporting documents and early repayment planning can prevent unexpected tax bills.
Because tax treatment depends on the timing, value and purpose of each transaction, directors should obtain advice from a qualified accountant or tax adviser before making substantial withdrawals, writing off a loan or clearing a balance with salary or dividends.
Frequently Asked Questions
Is a Director’s Loan Account the Same as a Bank Account?
No. It is an accounting record showing money owed between a director and the company. The money itself will normally move through the company’s bank account.
How Long Does a Director Have to Repay a Loan?
To avoid Section 455 tax, the loan should generally be repaid within nine months and one day after the end of the company’s Corporation Tax accounting period. A written agreement may require earlier repayment.
Can a Director Take an Interest-Free Loan?
Yes, but a taxable benefit may arise if the total balance exceeds £10,000 at any time and the director pays less than the official interest rate.
Can a Director’s Loan Account Stay Overdrawn?
It can remain overdrawn, but the company may face Section 455 tax, benefit reporting, National Insurance and cash-flow consequences. The director remains responsible for repaying the debt.
Can Business Expenses Reduce a Director’s Loan?
Yes. If the director personally paid genuine company expenses, the amount owed by the company may be credited to the director’s loan account. Receipts and evidence should be retained.
Can a Company Write Off a Director’s Loan?
A company may be able to release or write off a loan, but this can create Income Tax and National Insurance liabilities. The decision must also be commercially and legally appropriate.
Does Paying Section 455 Tax Mean the Loan Is Repaid?
No. Section 455 is a company tax charge on certain outstanding loans. The underlying debt continues until it is repaid, validly released or written off.
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