Director’s Loan Accounts Explained - and How to Avoid HMRC Trouble

If you’re a company director in the UK, chances are you’ve heard of a Director’s Loan Account (DLA), but many people still find it confusing.

It’s one of those areas that sounds simple at first, yet it can quickly get messy if you don’t keep track.

Let’s break down what a DLA is, how it works, and what HMRC expects from you.

What is a Director’s Loan Account?

A Director’s Loan Account is a record of all the money that moves between you and your limited company that isn’t salary, dividends, or expenses.

Think of it like a running tab between you and your company.

• If you take money out of the company (and it’s not a salary or dividend), that amount is recorded as the company lending you money.

• If you put money in (for example, covering business expenses from your personal account), that’s the company owing you money.

It’s not illegal to borrow from your company, but you need to follow the rules carefully to avoid extra tax or HMRC penalties.

When You Owe the Company Money

If your DLA is overdrawn, it means you owe the company money.

This often happens when directors take out cash before the company has made enough profit to pay dividends.

Here’s where HMRC steps in.

If the balance is still overdrawn more than nine months after your company’s year end, the company has to pay something called Section 455 tax which is currently 33.75% of the amount owed.

That’s a big chunk of cash that HMRC holds until you repay the loan. Once it’s fully repaid, your company can claim the tax back, but it can take months to process.

When the Company Owes You Money

If your DLA is in credit, it means the company owes you.

You might have used your own money to pay for company expenses, or maybe you transferred personal funds into the business to help with cash flow.

In this case, you can withdraw those funds at any time, tax-free, because it’s simply repaying you what’s owed.

Common Director’s Loan Mistakes

Here are the most common traps that catch directors out:

1. Treating the company bank account like a personal one
   Mixing business and personal spending makes it hard to track what’s a loan, a salary, or an expense.

2. Taking cash out before profits are available
   Many directors take drawings during the year and call them “dividends” later. If profits don’t cover them, those payments are actually loans (and taxable!)

3. Forgetting about the 9-month rule
   Leaving your loan unpaid past the 9-month mark after year end can trigger Section 455 tax.

4. Not recording it properly
   Your DLA needs to appear in the company’s accounts. HMRC can request records at any time, so keeping clear bookkeeping is essential.

How to Avoid HMRC Trouble

Here’s how to stay on the right side of the rules:

• Keep accurate records of every transaction between you and the company

• Check your loan balance regularly, especially near the year end

• Repay loans within 9 months of the company’s year end to avoid Section 455 tax

• Don’t re-borrow immediately after repaying - HMRC can challenge “bed and breakfasting” (where a loan is repaid and re-taken shortly after)

• Work with your accountant to plan dividends, salary, and drawings properly

Can You Charge or Earn Interest on a Director’s Loan?

Yes, but it depends who owes who:

• If the company owes you, it can pay you interest, which counts as income for you (and is an expense for the company).

• If you owe the company, HMRC may treat the loan as a “benefit in kind” if the interest rate is too low. That means you could owe extra tax personally.

What Happens If You Don’t Repay the Loan?

If you never repay an overdrawn loan, HMRC can treat it as income, meaning you could end up paying Income Tax and National Insurance on top of the company’s Section 455 tax.

It’s one of those cases where a small misunderstanding can lead to a large tax bill.

The Bottom Line

A Director’s Loan Account can be a useful tool when managed properly - for example, helping with short-term cash flow or tracking what the company owes you.

But if you ignore it, or treat company money like your own, it can cause serious tax issues down the line.

The key is keeping good records and planning ahead. If you’re unsure about your DLA or whether your company owes Section 455 tax, get advice before the year end - not after.

Need Help with Your Director’s Loan Account?

If you’re not sure whether your DLA has been handled correctly - or you just want to make sure you’re not setting yourself up for a surprise tax bill - we can help you review it and make a plan to stay compliant.

📞 Book your free call here and see how we can make sure your company stays on the right side of HMRC.