Director's loan account in a UK limited company
A practical guide to director's loan accounts, including section 455 tax and the beneficial loan rules.
A director’s loan account (DLA) records every transaction between a director and their company that is not salary, dividend, or repayment of legitimate business expenses. It is one of the most-misunderstood areas of UK small-company tax, and one HMRC examines closely on enquiry. This guide covers when section 455 tax bites, when a benefit-in-kind arises, and how to keep the account clean throughout the year. For the wider picture, see our hub on limited company finances.
What goes through the DLA
The DLA is a single ledger account for each director. Typical postings include:
- Money lent to the company (a credit balance, where the company owes the director)
- Money taken from the company that is not salary, dividend or expense repayment (a debit balance)
- Personal expenses paid by the company on the director’s behalf
- Asset transfers between director and company at market value
- Interest charged or paid on the balance
Track the running balance throughout the year, not just at year end. Our internal page on the director’s loan account in day-to-day operations and the directors and owners current accounts chart-of-accounts entry give the chart-level view.
The two tax traps
An overdrawn DLA — where the director owes the company — triggers two separate charges that catch directors out. Understanding both is essential before you take an advance.
Section 455 tax
If the DLA is overdrawn at the year end, the company must pay section 455 tax on the outstanding balance unless it is repaid within nine months and one day of the year end. The current rate mirrors the higher dividend rate. The tax is reclaimable once the loan is repaid, but the company’s cash is tied up in the meantime, often for a long time.
| Loan status at year end | Section 455 due |
|---|---|
| Repaid before 9 months and 1 day | None |
| Outstanding at 9 months and 1 day | Charged at the current rate on the balance |
| Repaid in a later year | Refundable 9 months after the year of repayment |
Beware bed and breakfasting: HMRC blocks repayments that are simply re-borrowed shortly afterwards. The anti-avoidance rules typically apply where the balance is £10,000 or more and a fresh advance is taken within 30 days of repayment, or where arrangements are in place to redraw the funds.
Beneficial loan benefit-in-kind
If the loan exceeds £10,000 at any point during the tax year and is not charged interest at the official rate, a beneficial loan benefit-in-kind arises. The director pays income tax on the deemed interest and the company pays Class 1A NIC.
| HMRC official interest rate | Used to calculate the BIK |
|---|---|
| Set by HMRC and revised periodically | Compared with the actual rate paid |
| Difference x average loan balance | Reportable on the P11D |
Writing off the loan
If the company writes off a director’s loan, the amount is taxed as a deemed dividend (income tax for the director) and treated as earnings for NIC purposes. It is rarely tax-efficient compared with paying a regular dividend, and it is one of the first things an inspector queries.
Best-practice routine
- Reconcile the DLA monthly, never just at year end
- Keep a separate ledger account per director
- Post personal-card-on-company-account transactions immediately
- Charge interest at the official rate to avoid a BIK on loans over £10,000
- Document every advance and repayment in a board minute
- Review the balance two months before year end to plan repayments
- Coordinate with dividend tax for limited company directors so dividends and loans are never confused on the ledger
The DLA rarely sits in isolation. Many directors draw down through the loan account during the year and clear it with a dividend before year end, which is why it pays to plan alongside paying yourself through salary versus dividends and a broader strategy for extracting profit tax-efficiently.
When directors lend money in
A credit balance (the company owes the director) is straightforward but still must be tracked. Interest paid by the company on a director’s loan is deductible for corporation tax, but the director must declare it as savings income, and basic-rate income tax is deducted at source via form CT61. Charging a commercial rate of interest on funds you have lent in is a legitimate way to draw value, and it sits naturally within wider corporation tax planning for a small company.
Closing summary
A clean DLA is the easiest way to avoid an unpleasant section 455 surprise. Reconcile it alongside bank reconciliation each month, and brief any new director on the rules before they take their first advance. The HMRC director’s loan guidance is updated with each Finance Act. See pricing for software with director’s loan tracking built in.