As a company’s director have you ever taken money out of your business or lent funds to it?
It means you have dealt with the Director’s Loan Account. It is an important part of managing your business finances.
In this Director’s Loan Account Guide, we will break down what exactly DLA is, how it works, and potential tax implications.
Let’s get into it!
Reach out to one of our professionals to get to know about Directors’ Loan Account in the UK. Get in touch with us and you will be provided instant professional help!
What Is a Director’s Loan?
It is a loan from the company to the director, or vice versa, it is not considered a salary, dividend, or repayment of a business expense. All transactions must be recorded in the company’s accounts as a DLA.
What Is a Director’s Loan Account (DLA)?
DLA or Director’s Loan Account is a record of all the financial transactions between a limited company and its directors. It tracks every time the director either puts their own money into the business or takes money out for personal use, outside of their regular salary or official dividends.
If a director puts their own money into the company, the DLA shows a credit, meaning the company owes them. Conversely, if a director takes money out for personal use, the account becomes overdrawn, meaning the director owes the company.
While useful for handling personal-business transactions, a consistently overdrawn account can trigger tax charges for both the company and the director if not repaid in time.
What Should a Director’s Loan Account Contain?
A Director’s Loan Account should track all the financial transactions between a director and the company. It should contain:
- Any withdrawal of cash taken by the director or personal use from the company’s bank account, that is not salary or dividend.
- It contains the director’s personal expenses where the company has to pay. It includes services like travel, rent, bills etc.
- Any funds paid by a director for the company’s expenses, or if he is providing capital into the business.
- Repayments made by the director to reduce the company’s debt.
- Any record of an interest charged on a loan, which must be a commercial rate.
What are the Interest Rates on Director’s Loan Accounts?
For the 2025/26 tax year, HMRC’s official rate of interest (ORI) for beneficial loans, including Director’s Loan Accounts (DLA) is 3.75% increasing from 2.25% which was in previous year according to GOV.UK .
Any director who borrows more than £10,000 from their company interest-free or at a rate below the ORI will incur tax implications.
How Much Can You Borrow in a Director’s Loan?
There is no specific legal limit of how much a director can borrow from their company’s loan account. But if it is exceeding a £10,000 threshold, it can trigger tax consequences.
Loans over £10,000 are treated as a Benefit in Kind, requiring the director to report it on their Self-Assessment tax return. This can result in potentially paying personal tax at the official rate of interest.
When Do You Need To Repay a Director’s Loan?
- A director’s loan must be repaid within nine months and one day after the end of the company’s accounting period.
- The loan balance is shown on the company’s balance sheet and is reported to HMRC on the Company Tax Return.
- If it is repaid after the nine-month deadline, the company can reclaim the S455 tax it had to pay.
What is an Overdrawn Director’s Loan Account?
It means that the director has withdrawn more money from its accounts than it has paid or received in the form of salary or dividends.
This creates a debt that the director owes to the company, which is recorded as an asset on the company’s balance sheet. It can lead to significant tax and legal implications if not repaid within nine months and one day of the company’s financial year-end.
What Are the Tax Implications of an Overdrawn Director’s Loan Account?
For the 2025/26 tax year, an overdrawn director’s loan account is subject to Corporation Tax and benefit in kind.
Corporation Tax
- If the loan remains unpaid nine months and a day after the company’s accounting period ends, the company must pay this tax at a rate of 33.75% on the outstanding amount.
- This tax is a temporary measure to discourage directors from taking long-term, tax-efficient loans from their company, not a penalty.
- The company can reclaim the S455 tax from HMRC once the loan is fully repaid, but only after a delay of nine months and one day following the date of repayment.
Benefit In Kind (BIK)
- The director may pay income tax on the value of the benefit received if the overdrawn loan account exceeds £10,000 at any point during the tax year.
- The company must charge interest on the loan at HMRC’ official rate to avoid this BIK.
- Any loan or interest not charged must be reported to HMRC on Form P11D and Form P11D (b).
How do you Deal With an Overdrawn Director’s Loan Account?
There are simple methods to deal with an overdrawn director’s loan account. They are explained below:
Repaying The Loan
The most simple and straightforward method is for the directors to repay the overdrawn amount to the company from their personal funds.
Declaring a Dividend
- If your company is in profit, and the director is a shareholder, then a dividend can be declared and used to set off the loan balance.
- The director will need to pay personal income tax on the dividend. So it is essential to compare the personal tax liability with the S455 tax to see which is more efficient.
Paying Interest On The Loan
- In order to formalise the arrangement, the company should charge interest on the overdrawn amount at HMRC’s official rate that is 3.75% for the 2025/26 tax year.
- This can avoid the potential for the loan to be considered a taxable benefit for the director.
Can you Repay Your Director’s Loan and Take Out Another Straight Away?
While a director can repay a loan and then take out another, HMRC has strict anti-avoidance rules to prevent this from being used as a tactic to indefinitely delay or avoid the Corporation Tax charge on the company. This practice is known as “bed and breakfasting”.
The rules are applied in two main ways:
- The 30-Day Rule: This applies if a director repays £5,000 or more of an overdrawn DLA and then takes out another loan of £5,000 or more within a 30-day period. The initial repayment is treated as ineffective, and the Section 455 tax charge is triggered on the amount that was repaid and re-borrowed.
- The Arrangements Rule: This rule applies if the outstanding loan is £15,000 or more before repayment. If, at the time of repayment, there is an arrangement or intention to take out a new loan of £5,000 or more at a later date, the repayment can also be disregarded for tax purposes. This rule can apply even if the new loan is taken out more than 30 days after the repayment.
Can a Directors Loan be Written-Off?
Yes, a company can formally write off a director’s loan, but it has significant tax implications for both the company and the director. The written-off amount is generally treated as a form of income for the director and will also attract National Insurance Contributions (NICs).
Tax Implications of a Written-Off Directors Loan
If a company is formally writing off the overdrawn loan, then the amount written off is considered a distribution of profits to the director.
Personal Income Tax
The amount written-off is treated as a dividend and is subject to personal income tax at the director’s relevant dividend tax rates. This depends on their income tax band.
National Insurance Contributions (NICs)
For NIC purposes, HMRC will likely treat the written-off loan as earnings from employment. This means both the company and the director will face Class 1 NICs on the amount, even if it’s considered a dividend for income tax.
Formal Documentation
In order to ensure the write-off is treated as a dividend and not income from employment, it is crucial to have a formal shareholder resolution approving the write-off.
This is documented in minutes to provide evidence for HMRC and prevent additional income tax or NICs from being applied
What Happens If Your Directors’ Loan Account Is In Credit?
This means the company owes money to the director. There are no immediate tax implications for the company on this lent money, and the director can withdraw the funds at any time.
However, if interest is charged, it is a business expense for the company and personal income for the director, who must pay income tax on it and report it on their Self Assessment tax return.
Bottom Line
We can conclude this topic by saying that a Director’s Loan Account can be a useful way to manage cash flow between you and your company.
It must be handled carefully to stay compliant with HMRC rules. By maintaining accurate records and understanding the repayment and tax deadlines, you can avoid costly mistakes and unnecessary tax bills.
Whether you’re borrowing from your company or repaying funds you’ve invested, keeping your DLA in good order ensures smooth financial operations and peace of mind.
Need help? Cheap Accountants in London are available to guide you more on VAT on flowers. Stay in touch!
Disclaimer: All the information provided in this article on Directors’ Loan Account, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.