The Directors Loan Account Explained

What the directors loan account is

The directors loan account, often shortened to DLA, is a record in your company books of money that moves between you and the company outside the normal routes. The normal routes are salary through the payroll, dividends from profit, and repayment of expenses you paid personally. Anything else is a loan one way or the other.

If the company owes you money, perhaps because you paid for something on its behalf, the account is in credit. If you owe the company money, because you have taken out more than your salary, dividends and expenses, the account is overdrawn. It is the overdrawn position that brings tax consequences, so that is where most of the attention goes.

Getting the account right depends on tidy bookkeeping, which is part of preparing your limited company accounts. It also connects closely to how you choose to pay yourself, covered in our guide on how directors pay themselves.

Money in and money out

It helps to picture the account as a single running balance.

• Money out, to you. Cash you draw from the business account that is not salary, a declared dividend or an expense repayment increases what you owe the company and pushes the account towards overdrawn.
• Money in, from you. Cash you pay into the company, or genuine expenses you covered personally, reduces what you owe or moves the account into credit.

Many directors dip into the account through the year and then clear it by declaring a dividend at the year end. That can be fine, but only if the company has the profit to support the dividend and the paperwork is done properly. Without profit, the drawing simply remains a loan. Our guide to salary versus dividends explains how dividends interact with the account.

Section 455 tax and the 9 months and 1 day rule

This is the rule that catches most people out. If the loan account is overdrawn at the company year end, the company has a window to clear it. That window is 9 months and 1 day after the year end, which is the same date the corporation tax is due.

If the overdrawn balance is not repaid by then, the company must pay section 455 tax at 33.75% of the amount still outstanding. This is a charge on the company, not on you personally, and it is best thought of as a deposit. It is fully refundable once the loan is repaid, but the refund itself is slow, coming 9 months and 1 day after the end of the accounting period in which you repay.

The lesson is that an overdrawn loan is not free money. Either repay it within the window or be ready for the company to pay 33.75% and wait to get it back. Planning this is part of sensible tax planning.

The £10,000 benefit in kind and notional interest

There is a second issue that sits alongside section 455. If your overdrawn loan goes above £10,000 at any point in the tax year, it is treated as a benefit in kind. In plain terms, the taxman views an interest free loan from your company as a perk.

To avoid the benefit, the company can charge you commercial interest on the balance, at or above the official rate. If it does not, a notional interest charge applies, which means tax on the benefit for you and a National Insurance cost for the company, reported on a P11D.

So two thresholds run at once. The year end position drives the 33.75% section 455 charge, while the £10,000 peak during the year drives the benefit in kind. A large loan can hit both, which is why keeping the balance low and documented is wise. Routing money through proper payroll and dividends helps you avoid relying on the loan account.

The bed and breakfasting rule

It might seem clever to repay the loan just before the year end and then take the money straight back out afterwards, avoiding the section 455 charge. HMRC closed this down with bed and breakfasting anti avoidance rules.

In broad terms, if you repay a loan and then redraw a similar amount within a short period, the repayment can be ignored for the section 455 test, so the charge still applies. The same idea blocks repaying through a new loan that simply replaces the old one. The rules are detailed, so the safe approach is to make repayments real and permanent rather than a quick in and out around the year end.

A worked example

You can see why a small overdrawn balance, cleared on time, is far cheaper than a large one left to run.

Common mistakes

The usual problems are avoidable with a little discipline.

• Treating drawings as income. Money taken without salary or a declared dividend is a loan, not pay, however regular it feels.
• Missing the 9 months and 1 day date. Leaving an overdrawn balance past this point triggers the 33.75% charge.
• Ignoring the £10,000 line. Going over £10,000 at any time creates a benefit in kind unless interest is paid.
• Bed and breakfasting. Repaying just before the year end and redrawing after is blocked by anti avoidance rules.
• No records. Without a clear account it is hard to prove what is a loan, an expense or a dividend.

What you should do

Keep the loan account up to date so you always know whether it is in credit or overdrawn. Plan dividends in good time, and only from available profit, so you can clear any overdrawn balance before the 9 months and 1 day deadline.

If the balance might exceed £10,000, decide early whether to charge commercial interest or accept the benefit in kind reporting. Avoid quick repay and redraw moves around the year end. If you are unsure where your account stands, we can review it for you, and you can request a fixed fee quote or book a call to get it sorted.

Frequently asked questions