Do you want to move money between yourself and your limited company? A directors loan account can be useful. However, taking money out without treating it correctly as salary, dividends, expenses, or a genuine loan can create unexpected tax liabilities.
So, it is important to understand how a director’s loan account works. This can help you keep accurate company accounts and avoid unnecessary tax charges. Moreover, if your account becomes overdrawn, your company may face a Section 455 tax charge, and you may also need to consider the tax treatment of a low-interest or interest-free loan.
In this guide, we will explain what a directors loan account is, how repayments work, the tax rules to understand in 2026/27, and the options available if your account becomes overdrawn.
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What Is a Director’s Loan?
A director’s loan is a loan from the company to the director, or vice versa. So, it is not considered a salary, dividend, or repayment of a business expense. Also, money a director lends to the company is recorded in the company’s accounts through the director’s loan account. This creates a balance that the company owes to the director.
What Is A Director’s Loan Account (DLA)?
DLA is a record of all the financial transactions between a limited company and its directors. It records relevant withdrawals, repayments, personal expenses paid by the company and amounts the director lends to the business, excluding transactions that are correctly treated as salary, dividends or business expense reimbursements.
If the account is in credit, the company owes the director. If it is overdrawn, the director owes the company money.
Depending on the size of the overdrawn amount, the date of repayment and the circumstances, a DLA may have tax consequences for the company and for the director. Such charges could be a tax charge under Section 455 on the company or a personal tax charge in respect of a low or no interest loan.
What Should a Directors Loan Account Include?
As mentioned above, a director’s loan account should record relevant transactions between the director and the company. Depending on the circumstances, these may include:
- Money the director lends to the company.
- Personal withdrawals from the company that are not salary or dividends.
- Repayments made by the director.
- Personal expenses paid by the company on the director’s behalf.
- Business expenses paid personally by the director that the company is required to reimburse.
- Interest charged on a loan, where applicable.
- Amounts properly credited to the account to settle or reduce the balance, such as salary or dividends that have been correctly authorised, declared and recorded.
Note that not every payment involving a director belongs in the loan account. Salary, dividends and genuine business expense reimbursements should be documented correctly rather than automatically treated as loans.
Additionally, your company should maintain supporting records, including bank statements, monthly payroll records, expense receipts, and dividend documentation where relevant.
What Is an Overdrawn Directors Loan Account?
An overdrawn directors loan account occurs when a director owes their limited company money. They owe money because they have withdrawn more than they have paid into the company or are otherwise entitled to receive.
Generally, the outstanding amount is recorded as an asset in the company’s balance sheet. If the loan remains unpaid for nine months and one day after the end of the company’s accounting period, the company may face a Section 455 tax charge, subject to the applicable rules. Other tax implications may also arise depending on the circumstances.
Why Can an Overdrawn DLA Be a Problem?
If your directors loan account is overdrawn, you may face tax implications depending on the amount outstanding. Here are the tax implications of an overdrawn director loan.
Section 455 Tax (Company)
If you are a shareholder and director of a close company, and didn’t repay the loan within nine months and one day after the end of the accounting period, your company may have to pay Section 455 tax.
Typically, the rate is 33.75% for loans made before 6 April 2026 and 35.75% for loans made on or after that date. The company may be able to reclaim the tax when the loan is repaid, released or written off, subject to HMRC’s rules. However, relief is generally not available until nine months and one day after the end of the accounting period in which the repayment, release or write-off occurs.
For more details on tax rates, visit the official government website.
Benefit in Kind (Director)
You may have to pay Income Tax on the benefit if the total outstanding loans exceed £10,000 at any point in the tax year and you pay no interest or interest below HMRC’s official rate.
Additionally, the company may need to report the benefit to HMRC and pay Class 1A National Insurance (NI). If the benefit is payrolled, the reporting process differs, but the employer may still have Class 1A NIC obligations.
How Do You Deal With An Overdrawn Directors Loan Account?
There are several ways to settle or reduce an overdrawn director’s loan account, depending on the company’s financial position and the circumstances.
Repaying The Loan
The most straightforward method for the director is to repay the overdrawn amount to the company from their personal funds.
Declaring a Dividend
If the director is a shareholder, the company may be able to declare a dividend and credit it against the overdrawn loan account, provided it has sufficient distributable profits, the dividend is properly authorised, and the director is entitled to receive it.
The director will need to pay personal income tax on the dividend. Therefore, it is essential to compare the personal tax liability with the S455 tax to see which is more efficient.
Paying Interest On The Loan
To formalise the arrangement, the company should charge interest on the overdrawn amount at HMRC’s official rate, which is 3.75% for the 2026/27 tax year. This can avoid the potential for the loan to be considered a taxable benefit for the director. However, it does not automatically remove any Section 455 tax liability.
Now that you understand the directors loan account and how it works, let’s discuss how much you can borrow in a director’s loan.
How Much Can I Borrow in a Director’s Loan?
The good news is there is no single fixed legal limit on how much a director can borrow from their limited company. However, remember that borrowing can have tax implications, particularly if the outstanding loan exceeds £10,000.
If the total outstanding balance of relevant interest-free or low-interest loans exceeds the threshold at any point during the tax year, you may have to pay Income Tax on the benefit of the loan.
When Do I Need To Repay a Director’s Loan?
To understand a directors loan account, it is crucial to know when you need to pay it. Here are the deadlines for repaying a director’s loan.
Repayment Deadline
If a director’s loan is subject to Section 455 tax, the company needs to clear it within nine months and one day after the end of its accounting period to avoid the charge.
Reporting the Loan
The outstanding director’s loan balance may need to be reported in the company’s accounts and Company Tax Return.
Reclaiming Section 455 Tax
If the company pays Section 455 tax and the loan is subsequently repaid, released or written off, it may be able to reclaim the tax from HM Revenue and Customs.
However, the claim usually cannot be made until nine months and one day after the end of the accounting period in which the repayment or other qualifying event occurs.
Can You Repay a Director’s Loan and Borrow the Money Again?
A director can repay a loan and borrow again. However, HMRC has anti-avoidance rules to prevent temporary repayments being used to avoid or delay a Section 455 tax charge. This practice is known as “bed and breakfasting.”
The rules work in two main ways:
The 30-Day Rule
Generally, the 30-day rule can apply when a director repays at least £5,000 of an overdrawn loan and takes out a further loan of at least £5,000 within 30 days before or after the repayment. 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
The arrangement 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.
What Happens If Your Directors Loan Account Is In Credit?
A director’s loan account is in credit when the company owes money to the director. The balance is usually recorded as a liability in the company’s accounts, and there is no immediate tax charge simply because the company owes you this money.
If the company pays you interest on the loan, the interest is usually a business expense for the company, subject to the normal tax rules. You need to declare the interest as taxable savings income and may need to report it on your Self Assessment tax return.
Can a Director’s Loan be Written Off?
Yes, a company can formally write off a director’s loan. However, this can have tax implications for both the company and the director. The written-off amount may be treated as taxable income or a distribution for the director, depending on the circumstances.
Moreover, if the director is also an employee, the write-off may attract National Insurance Contributions (NICs). Also, the company may be able to reclaim any Section 455 tax previously paid, subject to HMRC’s rules.
How Can CAIL Help with Your Directors Loan Account?
It is essential to manage a director’s loan account correctly. This can help you keep your company records accurate and avoid unexpected tax liabilities.
If your account is overdrawn or you need help preparing your company accounts or annual tax return services, CAIL can help. We can help you understand the accounting and tax obligations.
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Bottom Line
In conclusion, a director’s loan account can be a useful way to manage cash flow between you and your company.
Understand the relevant repayment deadlines, keep accurate records, and check the tax implications of borrowing from or lending money to your company. This can help you keep your company’s finances in good order and avoid unexpected tax charges.
If your director’s loan account is overdrawn or you are unsure how to record a transaction, it is best to seek expert advice.
Disclaimer: All the information provided in this article on Directors’ Loan Account, including all the text and graphics, is general in nature. It does not intend to disregard any professional advice.