Directors' Loan Account Guide

A directors’ loan account (DLA) records money that moves between a director and their company outside of salary, dividends and legitimate expense reimbursements. Because a limited company is a separate legal entity, any cash a director takes out that is not properly classified as one of those payments is effectively a loan from the company, and HMRC treats it accordingly. Getting the DLA wrong is one of the most common and costly mistakes for owner-managed companies, so it pays to understand the rules before your year-end. This guide explains how the account works and how to keep it tidy. For the wider picture, start with our limited company finances hub .

What a directors’ loan account is

Every limited company should maintain a DLA for each director. It is simply a ledger that tracks the running balance of what the director owes the company, or what the company owes the director, held in the director and owner current accounts in the chart of accounts. Typical entries include:

• Cash withdrawn that is not salary, dividends or an expense claim
• Personal bills paid from the company account
• Money the director pays into the company to fund it
• Expenses the director settles personally on the company’s behalf

The account is part of your statutory records and must be reflected accurately in the company’s annual accounts filed at Companies House and in the Corporation Tax return submitted to HMRC.

Overdrawn versus in credit

The direction of the balance matters a great deal.

• In credit: the company owes the director money. This is common where a director funds the business or absorbs costs personally. There is no tax charge on the company, and the director can be repaid at any time.
• Overdrawn: the director owes the company money, usually because they have drawn more than the salary, dividends and expenses available to them. An overdrawn DLA is where the tax consequences arise.

A small overdrawn balance is not illegal, but it must be managed carefully because two separate charges can apply: the section 455 charge and a benefit-in-kind.

The section 455 charge

If a DLA is overdrawn at the company’s year-end and the balance is not repaid within nine months and one day of that year-end, the company must pay a section 455 tax charge on the outstanding amount. This is calculated at the applicable rate on the overdrawn balance.

The key points to remember:

• It is a charge on the company, not the director.
• It is temporary. Once the loan is repaid, HMRC refunds the section 455 tax, although the refund is made roughly nine months after the end of the accounting period in which repayment occurs.
• It is reported through the Corporation Tax return.

Because the refund can take a long time to come back, the section 455 charge effectively ties up company cash. Clearing the loan before the deadline is almost always preferable.

Benefit-in-kind on cheap loans

If the overdrawn balance exceeds the de minimis threshold set by HMRC at any point in the tax year, and the director pays the company either no interest or interest below HMRC’s official rate, a benefit-in-kind arises. This is reported on a P11D and means:

• The director pays Income Tax on the value of the cheap loan.
• The company pays Class 1A National Insurance on the same benefit.

You can avoid the benefit-in-kind by charging interest at HMRC’s official rate, though that interest then becomes taxable income for the company. Many directors simply keep balances below the threshold or repay promptly.

The bed-and-breakfasting rules

A natural temptation is to repay an overdrawn DLA just before year-end to dodge the section 455 charge, then withdraw the same money shortly afterwards. HMRC closed this loophole with anti-avoidance rules, often called the bed-and-breakfasting rules.

Broadly, where £5,000 or more is repaid and a similar amount is redrawn within 30 days, the repayment is matched against the new withdrawal rather than treated as clearing the original loan. There are also wider arrangements rules for larger sums. The practical message is simple: a repayment must be genuine and lasting, not a paper exercise around the balance sheet date.

Clearing the loan before year-end

There are several legitimate ways to clear an overdrawn DLA:

Choosing the most efficient route ties in closely with how you take money out generally. See our guidance on extracting profit tax-efficiently and on salary versus dividends .

Record keeping

A clean DLA depends on disciplined bookkeeping throughout the year, not a scramble at year-end. Good practice includes:

• Recording every transfer between you and the company as it happens
• Separating personal spending from business spending at source
• Keeping receipts for any expense claims that reduce the balance
• Reviewing the running balance each month so surprises do not build up

These habits also keep you aligned with Making Tax Digital expectations around digital records. Our tax and VAT guides cover related compliance points.

Worked example

Suppose a director draws £30,000 during the year but only has £18,000 of salary and dividends available to cover it. At year-end the DLA is overdrawn by £12,000.

• If the £12,000 is repaid within nine months and one day of year-end, no section 455 charge applies.
• If it is not repaid in time, the company pays section 455 tax at the applicable rate on the £12,000, reclaimable later once the loan is cleared.
• Because the balance exceeds the de minimis threshold and no interest is charged, a benefit-in-kind also arises, giving the director an Income Tax charge and the company a Class 1A National Insurance liability.

The cleanest fix here is usually to declare a dividend before year-end, provided the company has enough distributable profits to do so.

Related guides

• Extracting profit tax-efficiently
• Salary versus dividends
• Corporation Tax planning
• Limited company finances hub