The director’s loan account, explained
A director’s loan account (DLA) is simply a running record in the company’s books of money moving between you and the company that isn’t salary, dividend or an expense reimbursement. It is a bookkeeping ledger, not a bank account. Almost every owner-managed company has one, and most of the trouble it causes is avoidable — if you know it is there.
Overdrawn or in credit
- In credit — the company owes you. You have put money in, or paid company costs personally. No tax charge; you can draw it back tax-free.
- Overdrawn — you owe the company. You have taken money out that isn’t salary or a declared dividend. This is where the tax lives.
Overdrawn balances rarely start deliberately. They accumulate: a personal card payment from the business account, drawings taken through the year against a dividend nobody declared, a holiday paid for in June and forgotten. The account is only as accurate as the bookkeeping behind it — which is why a DLA that nobody can explain is usually a bookkeeping problem before it is a tax problem.
The section 455 charge
If your DLA is overdrawn at the company’s year end and is still overdrawn nine months and one day after that year end, the company pays a section 455 charge on the outstanding balance.
| When the loan was made | Section 455 rate |
|---|---|
| On or after 6 April 2026 | 35.75% |
| 6 April 2022 to 5 April 2026 | 33.75% |
The rate follows the higher dividend rate, and it is fixed by when the loan was made — not by when it happens to be outstanding. A balance built up either side of April 2026 can therefore carry two rates at once, which is a detail a surprising number of summaries get wrong.
The charge is a deposit rather than a permanent cost: once the loan is repaid, released or written off, the company can reclaim it — but not straight away. The refund becomes due nine months and one day after the end of the accounting period in which the loan was cleared, claimed on form L2P, within four years. In practice the cash can be tied up for well over a year.
Worked example. Year end 31 March 2027. You take £40,000 in May 2026 and don’t repay it. At 1 January 2028 the balance is still outstanding, so the company owes 35.75% — £14,300 — payable with its corporation tax. Repay the loan in, say, June 2028 and the refund isn’t due until nine months and a day after the year end in which you repaid it.
The trap below the threshold: benefit in kind
Section 455 is not the only charge. If you owe the company more than £10,000 at any point in the tax year and pay no interest — or interest below HMRC’s official rate — you have a taxable beneficial loan. You are taxed on the interest you avoided, not on the loan itself. The company reports it on form P11D and pays Class 1A National Insurance.
HMRC’s official rate has been 3.75% and is reviewed quarterly, so check the current figure before calculating. Charging the company interest at or above the official rate removes the benefit in kind entirely — often the cheapest fix available, and one people forget exists.
Four ways to clear an overdrawn account
- Repay it in cash. Cleanest. Money goes back into the company bank account before the nine-month deadline.
- Declare a dividend. Only if there are sufficient distributable reserves — a dividend voted out of losses isn’t a dividend, it’s an illegal distribution and still leaves the loan. Dividend tax applies personally.
- Vote a bonus or salary. Clears the balance but attracts income tax and both classes of National Insurance, which is usually the most expensive route.
- Write it off. Possible, but it is treated broadly as income in your hands, National Insurance can follow, and the company does not get the corporation tax deduction people expect.
Don’t try the 30-day trick. Repaying the loan just before the deadline and taking the same money out again shortly after is caught by anti-avoidance rules covering repayments and redraws within 30 days, and by wider “arrangements” rules beyond that window. HMRC has seen it many times.
Why the number in the accounts is so often wrong
In practice the DLA is one of the least reliable figures in a small company’s balance sheet, because it is the account everything unexplained falls into. Payments nobody could code, personal costs run through the business, transfers between related companies parked in the wrong place. By the time it reaches the accountant it is a single balance with no story behind it — and substantiating it is billable work.
If your balance is material and you can’t explain how it arose, that is worth fixing before your year end rather than nine months after it, when the charge has already crystallised. The same applies if it looks suspiciously round, or hasn’t moved in a year.
Check what your books actually say — free, in about a minute
Export your trial balance from Xero and drop it into the free Vigil Health Check. It flags a material director’s loan balance and tells you which direction it runs, alongside the other things that trip up small-company accounts — suspense balances, missing stock, impossible margins. Nothing is uploaded: the analysis runs entirely in your own browser, and you get a one-page report to take to your accountant.
Check your books free →Built and used in practice by Peter Edwards ACMA CGMA · Insight Professional Partners Ltd (CIMA MiP)
Related: For practitioners: the three problems a DLA hides · What catch-up bookkeeping costs · What’s really in “sundry expenses”
General information, current at August 2026, not advice for your situation. Rates and thresholds change and the treatment of any particular balance depends on the facts. Check the current position with HMRC or your accountant before acting.