Director's Loan Account: What It Is, How It Works & Why HMRC Is Watching

Taking money from your limited company? If it's not salary or dividends...it's a director's loan.

Many limited company directors use their company bank account as if it were a personal account. A quick transfer here to cover a personal bill, a withdrawal there to bridge a cash flow gap at home. It feels straightforward but it's your company's bank account, after all.

However, the moment money moves between you and your company outside of salary, dividends or reimbursed expenses, you've created a director's loan. A director's loans come with rules that, if ignored, can cost your company a tax charge of over 35% on the outstanding balance.

This guide covers everything a limited company director in needs to understand about their director's loan account...what it is, how it works, what happens when it goes wrong and how to stay on the right side of HMRC.

What Is a Director's Loan Account?

A director's loan account (often called a DLA) is simply a running record maintained in your company's accounts of all the money that has passed between you personally and your company that isn't classified as salary, dividends or legitimate expense reimbursements.

Think of it as a ledger of IOUs in both directions. The DLA tracks two types of movements:

You Borrow From Your Company	You Lend Money To Your Company
The DLA is overdrawn (you owe the company) This is where the tax risks sit. HMRC scrutinises overdrawn DLAs closely.	The DLA is in credit (the company owes you) You can withdraw this money at any time, completely tax-free. No tax implications.

In practice, the overdrawn DLA is where most problems arise. That's what the rest of this article focuses on.

When Does a Director's Loan Account Become Overdrawn?

Your DLA becomes overdrawn whenever the total amount you've taken from the company exceeds the total amount you're owed by it or what you've formally received as salary or dividends. Common causes include:

• Transferring company funds to your personal account without declaring it as salary or dividends

• Paying personal bills directly from the company bank account

• Using a company credit card for personal spending

• Expenses claimed that weren't wholly and exclusively for business purposes

• Drawing funds in anticipation of a dividend that was never formally declared

None of these actions are necessarily wrong but they all need to be properly accounted for. An unrecorded or unmanaged overdrawn DLA is one of the most common issues HMRC picks up during an enquiry into a company's corporation tax return.

The 9 Month Rule and Why It Matters

Here's the crux of director's loan account tax rules: if your DLA is overdrawn at your company's year end and you don't repay the outstanding amount within nine months and one day of that year end, HMRC imposes a tax charge on the company called Section 455 tax.

Section 455 tax is not a small amount. From 6 April 2026, the rate is 35.75% of the outstanding loan balance, up from 33.75% on loans advanced before that date. This is deliberately set in line with the higher rate of dividend tax, making it one of the most expensive avoidable charges in small company tax.

To put that in context: if your DLA is overdrawn by £20,000 and you miss the nine month deadline, your company owes HMRC £7,150 in Section 455 tax on money you've already spent.

Example: How the 9 Month Deadline Works

Your company's year end is 31 March 2026. You have an overdrawn DLA of £15,000 at that date. You have until 1 January 2027 to repay the full £15,000.

If it's still outstanding on 1 January 2027, your company must pay Section 455 tax of £5,363 (35.75% of £15,000) alongside its corporation tax bill.

The good news: Section 455 tax is refundable once the loan is repaid. The bad news: it's not refunded immediately. The company can only reclaim it nine months and one day after the end of the accounting period in which the repayment was made, meaning cash can be tied up for well over a year before you see it back.

How to Clear an Overdrawn Director's Loan Account

If you find yourself with an overdrawn DLA approaching the nine month deadline, there are several ways to clear it. Each has different tax consequences:

• Cash repayment: transfer money from your personal account back to the company. This is the cleanest option and leaves no personal tax consequence, providing the repayment is genuine and not immediately followed by another withdrawal.

• Declare a salary or bonus: paying yourself a salary or bonus through PAYE to cover the outstanding amount clears the DLA, but triggers income tax and both employee and employer National Insurance. It can be expensive.

  
  

• Declare a dividend: if the company has sufficient retained profits, you can declare a dividend to cover the overdrawn amount. Dividends carry personal tax at dividend rates (10.75% or 35.75% in 2026/27) and must be properly documented with board minutes and dividend vouchers.

  
  

• Write it off: the least recommended option. Treated as dividend income and loses the corporation tax deduction. Only worth considering as a last resort after taking advice.

The right approach depends on your company's profit position, your personal income level, and how close you are to key tax thresholds. This is exactly the kind of decision that benefits from a conversation with your accountant before you act.

What If the Company Has Lent Money to You?

Not all director's loan accounts are overdrawn. If you've ever put your own money into the company to cover expenses from your personal account or injecting funds when the business needed cash, your DLA will be in credit. The company now owes you money.

This is a far simpler position. You can withdraw that money at any time without any tax charge as it's simply a repayment of money you lent to the company. You don't need to pay income tax on it and it doesn't need to go through payroll. The only requirement is that it's recorded accurately.

What HMRC Looks For & Why Director's Loans Are Actively Scrutinised...

Director's loan accounts appear in every company's annual accounts and corporation tax return. Any outstanding balance at year end must be disclosed on the CT600A supplementary form. HMRC can see them and they check them.

HMRC has run enforcement campaigns specifically targeting directors' loans in recent years, partly because informal withdrawals are one of the most common ways that company profits are extracted without the correct tax treatment.

If your DLA is overdrawn and poorly documented, it can attract an enquiry into both your corporation tax and personal tax positions. Good record keeping is your first line of defence. Every transaction through the DLA should have a corresponding entry in your bookkeeping and your accountant should be reviewing the balance regularly, ideally at least quarterly and not just at year end.

Is Your Director's Loan Account Under Control?

An unmanaged DLA can cost your limited company thousands in avoidable tax and HMRC is actively checking them. If you're a limited company director in Derby, Coventry or the Midlands and you're unsure about your director's loan account balance, now is the time to act.

AccountingBliss can review your DLA position, help you clear overdrawn balances tax-efficiently and make sure your accounts are HMRC-ready.

Book a free consultation today