Director loan accounts: what they are and the tax rules that apply

What goes into a director loan account

The DLA is a running ledger entry in the company's accounts. It goes into debit (overdrawn) when a director takes money from the company that is not salary, dividend, or expense reimbursement — including drawing cash, paying personal bills from the company account, or having the company repay a director's personal debt. It goes into credit when a director lends money to the company, leaves unpaid salary in the company, or repays an earlier withdrawal.

Many small company directors run overdrawn DLAs without realising it, particularly where salary and dividends are not formally minuted at the time of payment. Good bookkeeping requires every transaction to be categorised at the point of entry, not retrospectively.

The Section 455 charge and how to avoid it

If the DLA is overdrawn at the company's accounting year-end and is not repaid within nine months and one day of that date, the company must pay a Section 455 tax charge on the outstanding balance. The rate mirrors the higher dividend additional rate and is a temporary charge: it is repayable to HMRC once the director repays the loan. However, the repayment must not be a "bed and breakfasting" arrangement — borrowing the money back within 30 days of repayment does not count as clearance.

The nine-month window aligns with the Corporation Tax payment deadline for small companies. Directors should review their DLA position before the year-end and factor in whether a dividend can lawfully be declared to clear the balance. Confirm the precise calculation and any relevant anti-avoidance provisions with your accountant.

Beneficial loan rules for balances above £10,000

Where a director's overdrawn DLA exceeds £10,000 at any point in the tax year and the company charges no interest (or interest below HMRC's official rate), the difference between the interest charged and the official rate is treated as a benefit in kind. This triggers a P11D filing requirement and a National Insurance charge on the company, as well as an income tax charge on the director personally.

Some directors choose to charge a nominal interest rate on large DLAs to neutralise the benefit-in-kind position. The interest paid is income in the company's hands and may itself have tax implications. Speak to your accountant before deciding which approach is more efficient for your situation.

DLAs and company insolvency

An overdrawn DLA becomes a debt owed by the director to the company. In an insolvency, the liquidator has a duty to call in that debt for the benefit of creditors. Directors cannot simply write off the balance or convert it to a dividend after the fact if the company is insolvent at that point — such steps may constitute a preference or fraudulent transaction that the liquidator can reverse.

If a business is in financial difficulty and you have a significant overdrawn DLA, seek insolvency advice promptly. The existence of the DLA will be scrutinised, and failure to repay it can result in personal liability claims against the director.