A director’s loan account, or DLA, records money moving between a director and their company that is neither salary, dividend nor a legitimate expense repayment. It tracks what the director owes the company and what the company owes the director. Keeping it accurate matters, because an overdrawn account left unpaid triggers a Corporation Tax charge and can create a taxable benefit. This guide explains how the account works and the tax that follows.
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Most owner managed companies run a director’s loan account almost without noticing. A director pays a supplier from a personal card, or draws cash before a dividend is formally declared, and the balance shifts. Understanding the account helps you avoid unexpected tax and awkward questions from HMRC. For the wider picture, see our accountancy and tax guide.
What is a director’s loan account?
A director’s loan account is a running record in the company’s books of every transaction between the director and the company that sits outside normal pay. Money out includes cash the director withdraws, personal bills paid by the company and expenses that are not genuinely business related. Money in includes personal funds the director puts into the business, salary and dividends properly voted, and expenses the company owes back to the director.
The account has a single running balance. When the company owes the director money, the account is in credit and the director can draw that back tax free. When the director owes the company, the account is overdrawn, and that is where the tax rules bite. Deciding how to take money out sensibly often comes down to the balance between pay and profit distributions, which we cover in salary versus dividends.
What makes a loan account overdrawn?
An account is overdrawn when the director has taken more from the company than they have put in or been credited through salary and dividends. In practice this happens when drawings run ahead of declared dividends, or when the company settles personal costs. An overdrawn balance is effectively a loan from the company to the director, and both Corporation Tax and personal tax rules then apply.
What is the section 455 charge?
If an overdrawn balance is still outstanding nine months and one day after the end of the company’s accounting period, the company must pay a Corporation Tax charge under section 455. The rate is 33.75% of the amount still owed, or 32.5% where the loan was made before 6 April 2022. This charge is separate from the company’s ordinary Corporation Tax, which we explain in Corporation Tax explained.
The section 455 charge is best thought of as a deposit rather than a permanent cost. Once the director repays the loan, or it is written off or released, the company can reclaim the tax. Where the loan is cleared within two years of the period end, the reclaim is made on the Company Tax Return using form CT600A. After two years, form L2P is used. HMRC repays the section 455 tax to the company, though it cannot be recovered until nine months and one day after the end of the period in which the loan was cleared, and any interest paid on the charge is not refundable.
Is an overdrawn loan a benefit in kind?
Where the total of a director’s loans is more than £10,000 at any point in the tax year, and the loan is interest free or carries interest below HMRC’s official rate, it counts as a benefit in kind. The official rate is 3.75% from 6 April 2025. The company reports the benefit on form P11D and pays Class 1A National Insurance on it, and the director includes it on their self assessment return. Our page on benefits in kind and the P11D sets out how this is reported.
If the director pays interest to the company at or above the official rate, no benefit arises. Any interest the company charges is taxable income for the company. Note that the £10,000 threshold and the section 455 charge are separate tests, so a loan can create a benefit in kind, a section 455 charge, both, or neither.
What are the bed and breakfasting rules?
HMRC has rules to stop directors clearing an overdrawn balance just before the year end, only to redraw the money shortly after and dodge the section 455 charge. Under the 30 day rule, where £5,000 or more is repaid and £5,000 or more is drawn again within 30 days, the repayment is matched against the new borrowing, so the original loan is treated as still outstanding. A further rule applies where the balance is £15,000 or more and there are arrangements to redraw, regardless of the 30 days. Genuine repayments funded by, say, a voted dividend are not caught.
How should records be kept?
Good records are your best protection. Keep a clear ledger of every director transaction, distinguish real business expenses from personal spending, and formally document dividends with board minutes and vouchers before drawing against them. Reconcile the account regularly rather than at the year end scramble, and agree the closing balance with your accountant. Clean records make the tax position obvious and reduce the risk of an enquiry turning into a dispute.
Overdrawn loan accounts are a common HMRC enquiry area, and even a well run company can be selected for a check. A Solar Protect policy can cover up to £100,000 of your accountant’s fees with no excess, so your own accountant can defend the position without the cost falling on you. Learn more about tax investigation insurance or get a quote.
Related guides: tax investigation insurance for company directors.
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Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.