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 records every transaction between a director and their company that is not a salary, dividend, or repayment of expenses. It is one of the most-misunderstood areas of UK small-company tax, and one HMRC examines closely. This guide covers when section 455 tax bites, when a benefit-in-kind arises, and how to keep the account clean.
What goes through the DLA
The DLA is a single ledger account for each director. Typical postings:
- Money lent to the company (credit balance)
- Money taken from the company that is not salary, dividend or expense repayment (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 balance throughout the year, not just at year end. Our internal page on director’s loan account and the directors and owners current accounts chart-of-accounts entry give the chart-level view.
The two tax traps
Section 455 tax
If the DLA is overdrawn (the director owes the company) at the year end, the company must pay section 455 tax at 33.75% of the balance unless it is repaid within nine months and one day. The tax is reclaimable once the loan is repaid, but cash is tied up in the meantime.
| Loan status at year end | Section 455 due |
|---|---|
| Repaid before 9 months and 1 day | None |
| Outstanding at 9 months and 1 day | 33.75% of balance |
| Repaid in a later year | Refund 9 months after year of repayment |
Beware bed and breakfasting: HMRC blocks repayments that are immediately re-borrowed. Loans of £10,000 or more or 30-day rules typically apply.
Beneficial loan benefit-in-kind
If the loan exceeds £10,000 at any point during the tax year and is not at the official rate of interest, a 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 quarterly by HMRC | Compare to 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 subject to NIC (HMRC treats it as earnings for NIC purposes). It is rarely tax-efficient compared with paying a regular dividend.
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 BIK on loans over £10,000
- Document every advance and repayment as 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 not confused
When directors lend money in
A credit balance (company owes 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 CT61 .
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.