A director’s loan account is one of those things that sounds straightforward until the tax implications start stacking up. At its core, a director’s loan account records money that passes between you and your company outside of salary, dividends, or genuine expense reimbursements. Every pound you take out that doesn’t fit those categories goes into the account as a borrowing, and every pound you put back in reduces the balance.

The account itself is just a ledger entry in your company’s books. The reason it matters is that HMRC has specific rules about what happens when the balance tips the wrong way, and the tax charges involved are more severe than most directors expect. In our experience, the DLA is one of the most commonly misunderstood areas of limited company accounting.

Here is a clear explanation of how it all works.

A director’s loan is any money you take from the company that is not one of the following: salary processed through payroll, a dividend declared from after-tax profits, reimbursement of a genuine business expense, or repayment of money you personally lent to the company at an earlier point.

In practice, this catches a wide range of transactions. Using the company account to pay a personal bill, drawing extra cash because the month is tight, or simply transferring money to your personal account without a payroll or dividend declaration: all of these are director’s loans unless they are documented otherwise.

Close family members can also create entries in the director’s loan account if they receive money from the company without a proper employment or contractual basis. This is worth bearing in mind if family members are involved in the business at all.

The company is legally required to keep a record of all of this, and the balance at your financial year-end must appear on the balance sheet in the statutory accounts. It is not optional, and it is one of the first things a diligent accountant will look at when preparing your year-end figures.

The director’s loan account can sit in one of two states, and which state it is in determines your tax position entirely.

In credit

If the account is in credit, the company owes you money. This typically happens when you have lent money to your company, paid for business expenses from your own pocket, or invested personal funds at startup. There is no immediate tax charge in this situation. You can draw that money back from the company at any time without triggering income tax or National Insurance, because you are simply recovering funds that were already yours.

Overdrawn

If the account is overdrawn, you owe the company money. This is where the tax complications begin. An overdrawn balance is not automatically a problem, but it triggers a specific set of HMRC rules that carry real financial consequences if you do not manage the position carefully.

Many directors run a small overdrawn balance throughout the year with the intention of clearing it via a dividend declaration at the year-end. That approach can work well, but it only works if the timing and the documentation are right. Getting one of those elements wrong is where directors tend to come unstuck.

If your director’s loan account is overdrawn at the end of your company’s Corporation Tax accounting period and the loan is not repaid within nine months of that date, the company faces a tax charge under Section 455 of the Corporation Tax Act 2010.

The rate currently stands at 33.75% of the outstanding balance. So if you owe the company £20,000 and the nine-month deadline passes, the company owes HMRC £6,750 on top of its regular Corporation Tax bill. Interest accrues on that amount until it is settled.

The good news is that the charge is repayable once the loan itself is cleared. If you repay the loan or it is formally written off or released, the company can reclaim the Section 455 tax it paid, though not any interest that accumulated. The reclaim process involves filing with HMRC and is not instant, so the cash-flow impact of missing the deadline can be significant.

There is also a second, less well-known trigger: if you repay a loan and then draw a new one within 30 days of the repayment, HMRC can apply the charge as if the original loan had never been repaid. This anti-avoidance provision is sometimes called the “bed and breakfasting” rule, and it catches directors who cycle money in and out of the account around the year-end purely to avoid the charge.

There is a second layer of tax to consider if the overdrawn balance exceeds £10,000 at any point during the tax year and you are also a shareholder in the company.

Once that threshold is crossed, the loan is treated as a benefit in kind. The company must report this on a P11D return and deduct Class 1 National Insurance on the notional benefit. The benefit is calculated as the difference between the interest you actually pay on the loan (if any) and HMRC’s official rate for the tax year.

For 2025/26, that official rate is 3.75%. If you have borrowed £30,000 from your company and paid no interest on it, the annual benefit in kind is £1,125, and both you and the company face a tax and National Insurance cost on that figure.

The practical takeaway is straightforward: if you regularly draw from the company and the balance runs above £10,000, formalise the arrangement. Have the company charge interest at the official rate, document it properly, and make sure the P11D filing reflects the position. It costs far less to manage this cleanly than to deal with an HMRC enquiry later.

For a broader view of how to structure what you take from your company, our guide on how to pay yourself as a limited company director covers the full picture.

Some directors assume that if a loan is simply written off rather than repaid, it disappears quietly. HMRC’s position is the opposite. Under Section 415 of the Income Tax (Trading and Other Income) Act 2005, a director’s loan that is released or written off is treated as income in the hands of the director and taxed accordingly.

This was reinforced in the Upper Tribunal in 2026 (HMRC v Gary Quillan [2026] UKUT 300 (TCC)), where the court found against a director whose overdrawn loan account remained unrepaid through a voluntary liquidation. The tribunal confirmed that a debt written off during liquidation is still taxable income for the director, even where no formal write-off resolution had been passed. The ruling closed a potential gap that some had hoped could shield unpaid loans from income tax in winding-up scenarios.

The message from recent case law is consistent: HMRC is actively pursuing director’s loan positions, and attempts to engineer an outcome that avoids the tax charge tend to attract scrutiny rather than avoid it.

HMRC also launched a consultation in March 2026 proposing new mandatory reporting requirements for transactions between close companies and their participators, which would include director’s loans. The landscape around DLA compliance is becoming more formal, not less, and keeping clean records from the outset is the only sensible approach.