What is a director's loan account?
A director's loan account is the record of money moving between a director and their company that is not salary, dividends or repaid expenses.
What a director's loan account means
A director's loan account (DLA) is a running balance in your company's books. It records every payment between you and the company that is not salary, a declared dividend or a reimbursed business expense. If you pay a company bill from your personal card, the company owes you money and the account is in credit. If you take money out of the business bank account for personal use, you owe the company and the account is overdrawn.
The account is perfectly normal. Most owner-managed companies have one. The tax problems only start when the balance is overdrawn at the year end and stays that way.
Example
Priya runs a design company with a 31 March year end. During the year she takes £14,000 from the company account for a house deposit, and pays £2,000 of company software subscriptions on her own card. Her director's loan account is overdrawn by £12,000 at 31 March.
- If she repays the £12,000 (or declares a dividend to clear it) by 1 January, nine months and one day after the year end, there is no S455 charge.
- If the £12,000 is still outstanding on that date, the company pays S455 tax of 33.75%, which is £4,050. It gets this back once the loan is repaid, but only nine months and one day after the end of the accounting period in which the repayment happens.
- Because the loan went over £10,000 at some point in the year, it is also a beneficial loan. Unless she pays the company interest at HMRC's official rate, the interest saved is a benefit in kind reported on a P11D, with Class 1A National Insurance at 15% for the company.
Why it matters for your business
An overdrawn loan account ties up cash. The S455 charge is temporary but it can sit with HMRC for well over a year. It also matters if the company gets into financial difficulty: a liquidator can demand repayment of an overdrawn director's loan in full.
HMRC also watches for "bed and breakfasting", where a director repays a loan just before the deadline and borrows it straight back. Repayments of £5,000 or more that are reborrowed within 30 days are ignored for S455 purposes, and larger loans have a wider rule if there was an intention to redraw.
Director's loan vs salary or dividends
A loan is not income, so it is not taxed when you take it. But it has to be repaid, written off (which makes it taxable income) or cleared with salary or dividends. Planning how you will clear it before the year end is usually cheaper than paying S455 and waiting for the refund.
Cloudkeepers reviews director's loan balances with clients before every year end so there are no surprises.
Common questions
No. Directors can borrow from their company, although loans over £10,000 should be approved by the shareholders. The issue is tax: an overdrawn balance left unpaid nine months and one day after the year end triggers S455 tax at 33.75%, and loans over £10,000 can create a benefit in kind.
You can repay it from personal funds, have the company declare a dividend and set it against the balance, or pay a bonus through payroll. Dividends need enough distributable profit, and a bonus carries income tax and National Insurance. The cheapest route depends on your income for the year.
Yes. If you have paid company costs personally or lent it money, the account is in credit and the company can repay you tax free at any time. You can also charge the company interest, which is deductible for it and taxable income for you.