A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
Quick answer
A director's loan account (DLA) records money moving between a director and their limited company that is not otherwise salary, a dividend, a business expense or repayment of money already owed. If the account is in credit, the company owes the director money. If it is overdrawn, the director owes money to the company, which can trigger tax and company-law consequences.
At a glance
- In credit: the company owes you money. Overdrawn: you owe the company money.
- If the total balance on relevant beneficial loans exceeds £10,000 at any time during the tax year, an interest-free or low-interest loan may create a taxable benefit in kind.
- For relevant loans made from 6 April 2026, the section 455 rate is 35.75%.
- HMRC's official interest rate from 6 April 2026 is 3.75%, subject to quarterly review.
- Section 455 is payable nine months and one day after the end of the accounting period if the loan is still outstanding.
- Anti-avoidance rules (30-day and arrangements rules) can block repay-and-redraw strategies around the deadline.
- If the company becomes insolvent, an overdrawn DLA is normally an asset a liquidator can pursue.
What is a director's loan account?
A director's loan account is simply an accounting record showing whether money is owed to the director by the company or by the director to the company.
It is not normally a separate bank account. Think of it as a running tab between you and the limited company.
A DLA can be:
- nil — nobody owes anything;
- in credit — the company owes you;
- overdrawn — you owe the company.
The key principle is that a limited company is legally separate from its owners. Even if you own every share, money in the company bank account belongs to the company until there is a proper reason for it to be paid to you.
What payments normally go through a director's loan account?
Common DLA entries include:
- money you personally lend to the company;
- business expenses you pay personally;
- repayments the company makes to you;
- personal expenses paid by the company;
- cash you withdraw that is not salary or dividend;
- amounts later credited by a properly declared dividend;
- interest charged on money lent between you and the company, where appropriate.
Simple example
You personally pay £2,000 of genuine company expenses on your credit card. The company now owes you £2,000, so your DLA is £2,000 in credit. You later transfer £1,500 from the company bank account to yourself. If that is simply repayment of the money already owed, your DLA falls to £500 in credit.
What does it mean if my director's loan account is in credit?
If your DLA is in credit, the company owes you money. For example, you might have lent £20,000 to a new company to fund working capital. Provided that £20,000 is genuinely a loan rather than share capital or something else, the company can normally repay the principal to you later without the repayment itself being salary or a dividend. Interest can potentially be charged, but interest has separate tax and reporting consequences and should be agreed and recorded properly.
What does an overdrawn director's loan account mean?
An overdrawn DLA means you owe money to your company. For example, if you transfer £30,000 from the company to your personal bank account and it is not salary, dividend, expense reimbursement or repayment of an existing credit balance, the company may have made a £30,000 loan to you. That £30,000 is not automatically yours simply because you own the business — it is a debt due back to the company.
Can a director borrow money from their own company?
Yes, but tax and company-law rules need to be considered. Under section 197 of the Companies Act 2006, member approval is generally required before a company makes a loan to one of its directors, subject to statutory exceptions. One exception covers smaller loans where the aggregate value of the relevant loan and other relevant arrangements does not exceed £10,000. For a sole shareholder-director, obtaining approval may be administratively straightforward, but that does not mean the legal requirement should be ignored. For any substantial loan, consider the paperwork before transferring the money.
What happens if my director's loan exceeds £10,000?
If the total balance on relevant beneficial loans exceeds £10,000 at any time during the tax year, the small-loan exemption will generally no longer apply. An interest-free or low-interest employment-related loan can then create a benefit in kind. Broadly, the taxable benefit is the difference between interest calculated using HMRC's official rate and any interest actually paid by the director.
The £10,000 figure is an exemption threshold — it is not simply the first £10,000 of every loan being tax-free. For 2026/27, HMRC's official sterling rate is 3.75% from 6 April 2026. HMRC now reviews the rate quarterly, so it can change during the tax year. The benefit can create Income Tax for the director and Class 1A National Insurance for the company where the conditions are met.
Read the detailed guide: What Happens If a Director's Loan Exceeds £10,000?
What is section 455 tax?
Section 455 is a temporary company tax charge that can apply where a close company lends money to a shareholder or other participator and the relevant amount remains outstanding beyond the statutory payment deadline. For relevant loans made on or after 6 April 2026, the section 455 rate is 35.75%.
Example: £40,000 loan
If a shareholder-director has a chargeable £40,000 loan still outstanding at the relevant date:
£40,000 × 35.75% = £14,300
The company can therefore have to pay £14,300 to HMRC. Crucially, the director still owes the company £40,000. Section 455 tax does not settle or cancel the underlying debt.
Read the detailed guide: Section 455 Tax Explained: Director's Loan Rates, Deadlines and Repayment.
What is the director's loan nine-month rule?
For a typical close company, section 455 tax is payable nine months and one day after the end of the company's accounting period if the relevant shareholder loan remains outstanding. If the relevant amount is genuinely repaid before that payment date, the company can generally avoid actually paying section 455 on that amount, although reporting requirements can still apply. The exact timing matters, particularly where loans are repaid shortly before the deadline and then redrawn.
Read the detailed guide: The Director's Loan 9-Month Rule Explained.
Can I repay the loan and immediately borrow it back?
Do not assume so. HMRC has anti-avoidance rules aimed at temporary repayments followed by substantially the same money being borrowed again. Broadly:
- the 30-day rule can apply where repayments totalling £5,000 or more are matched with new chargeable loans totalling £5,000 or more within the relevant 30-day period; and
- a wider arrangements rule can apply where at least £15,000 is outstanding immediately before repayment and arrangements exist for at least £5,000 to be borrowed again.
The detailed matching rules are more technical than those headline figures. If a material loan is approaching the deadline, take advice before moving cash in and out.
Can a dividend clear an overdrawn director's loan account?
Yes, a properly declared dividend can often be credited to the DLA if the company has sufficient distributable profits. The important word is lawful. A dividend cannot simply be invented retrospectively because a director has withdrawn too much money. The company must have sufficient distributable reserves and the dividend should be properly declared and recorded.
Example: DLA overdrawn £20,000 — lawful dividend declared £20,000 — dividend credited to DLA — resulting DLA: £nil.
Read the step-by-step guide: How to Clear an Overdrawn Director's Loan Account.
Can salary or a bonus clear the loan?
Potentially, but salary and bonuses have PAYE and National Insurance consequences and must genuinely represent remuneration. Historic drawings are not an accounting bucket that can always be relabelled as whatever gives the best tax result after the event.
Can the company simply write off my director's loan?
A company can potentially release or write off a loan, but the amount does not disappear tax-free. A loan released or written off to a shareholder/participator will generally be brought into the individual's taxable income under the relevant close-company rules. Where the individual is also an employee/director, National Insurance consequences can also require consideration. A write-off should therefore be planned, not used as an afterthought.
What happens if the company becomes insolvent?
An overdrawn director's loan is normally an asset of the company. If the company enters liquidation, the liquidator can seek to collect that debt for creditors. If the accounts show a £75,000 overdrawn DLA, the director should not assume the balance disappears because the company has failed. This is one of the most important practical reasons not to let a large DLA accumulate casually.
A practical example: how a DLA gets out of control
James owns a building company and takes normal salary and dividends, but also uses the company account for extra personal spending:
- House deposit: £25,000
- Holiday: £6,000
- Personal credit-card payment: £7,500
- Extra cash transfers: £15,000
Total additional withdrawals: £53,500. The company does not have enough distributable profits to support an extra £53,500 dividend. If the amount is a chargeable shareholder loan made on or after 6 April 2026 and remains outstanding at the relevant section 455 date:
£53,500 × 35.75% = £19,126.25
The company can face more than £19,000 of section 455 tax, while James still owes the underlying £53,500. He may also have a beneficial-loan issue because the balance exceeded £10,000.
The dos and don'ts of director's loan accounts
Do
- Keep personal and company spending separate.
- Keep evidence for company costs you pay personally.
- Monitor the DLA during the year.
- Check distributable profits before declaring dividends.
- Consider Companies Act approval before significant borrowing.
- Review the £10,000 beneficial-loan threshold.
- Know the company's accounting-period end and section 455 payment deadline.
- Have a genuine repayment or clearance plan.
Don't
- Treat the company bank account as your personal bank account.
- Assume all drawings can become dividends later.
- Ignore an overdrawn balance because the company is profitable today.
- Repay and immediately redraw money merely to try to defeat section 455.
- Assume a write-off is tax-free.
- Wait until months after the year end to discover the balance.
How should directors take money from a company instead?
For an owner-managed company, personal value is usually extracted through some combination of salary or bonus, dividends, employer pension contributions, reimbursement of genuine business expenses, repayment of a DLA that is already in credit, and — in some circumstances — a properly planned director's loan. These routes have different tax consequences. Good planning starts before the money is taken.
Related guide: The Most Tax-Efficient Director's Salary and Dividends for 2026/27.
What we see in practice
The most common DLA problem is not deliberate tax avoidance. It is poor visibility. A director believes they are simply "taking money out of my business" while the accountant sees an accumulating debtor balance. By the time the annual accounts are prepared, the director may be surprised to discover a personal debt and a section 455 exposure. For owner-managed companies, we recommend reviewing the DLA alongside salary and dividend planning during the year rather than treating it as a year-end bookkeeping tidy-up.
The business accounting services we provide to owner-managed companies include routine DLA monitoring and remuneration planning. If you have a question about directors' and shareholders' tax, we are here to help.
