What Is a Director's Loan Account and How Does It Appear in Company Accounts?

What a director's loan account records

A director's loan account is a running ledger that tracks all money flows between a director and the company that are not classified as salary, dividends, or expenses reimbursements. If a director puts personal funds into the company — for example, to cover a cash shortfall — this creates a credit balance on the DLA: the company owes money to the director. If a director draws money from the company beyond their declared salary and dividends, this creates a debit (overdrawn) balance: the director owes money to the company.

Directors of owner-managed businesses frequently have DLAs because the boundary between company and personal finances can blur in practice. The Companies Act and HMRC treat the director and the company as entirely separate legal persons, regardless of how connected they feel in practice.

Tax consequences of an overdrawn DLA

If a director's loan account 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 Corporation Tax charge on the outstanding amount. This charge is refundable once the loan is repaid, but it is a real cash cost in the interim. If the overdrawn balance exceeds £10,000 at any point during the tax year, the difference between the commercial rate of interest and any interest actually charged becomes a taxable benefit in kind for the director, reported on a P11D. Confirm the current applicable rates and thresholds with your accountant, as these can change.

How lenders view director's loan accounts

Commercial lenders scrutinise the DLA balance when reviewing accounts because it reveals the financial discipline of the director-company relationship. A large overdrawn DLA that grows year-on-year suggests the director is drawing cash from the business informally, potentially ahead of profitability — which raises questions about cash flow management and whether the stated profit has actually been retained in the business. A credit DLA (where the director has lent money to the company) can indicate that the company has needed director support to remain liquid, which is also a concern.

Lenders will typically ask for an explanation of the DLA balance and whether it is intended to be repaid, converted to equity, or allowed to stand. Where an overdrawn DLA is large relative to the company's net assets, it may reduce the effective tangible net worth of the business from a lender's perspective.