Director's loan account explained: rules, tax, and the £10,000 trap

If you're a director of a UK limited company, you have a director's loan account whether you know it or not. It's the running tally of money owed between you and the company. Get it right and it's a useful cash-flow lever. Get it wrong and it can trigger a 33.75% tax charge on top of your normal tax, plus a benefit-in-kind bill you didn't budget for.

Here's how it actually works.

What is a director's loan account?

Every director-shareholder has a director's loan account (DLA) with their company. It tracks two things:

• Money you owe the company (director owes the company).
• Money the company owes you (company owes the director).

Anything that isn't salary, formally declared dividends, or a repayment of expenses is a DLA movement. Common examples:

• You put £5,000 of your own money into the company at the start. Company owes you £5,000.
• You take £2,000 out of the business account for a personal cost. Director owes company £2,000.
• You claim £400 of expenses but haven't paid them from your personal account. Company owes you £400.
• You transfer £10,000 out mid-year, planning to "sort it at year-end". Director owes company £10,000 until it's cleared.

The balance can go either way, and it changes constantly. Your accountant reconciles it at year-end (or ideally monthly).

The two positions and what each means

Company owes you (a credit balance)

Fine. Perfectly normal. Common if you put money in at the start or paid business costs personally.

• You can withdraw it any time, tax-free.
• The company can pay you interest on it (deductible for corporation tax; you'd declare it on your Self Assessment).
• No filing implications beyond appearing in the accounts.

You owe the company (an overdrawn DLA)

This is where the tax rules kick in. There are two separate charges to watch.

The £10,000 benefit-in-kind trap

If your overdrawn DLA balance exceeds £10,000 at any point in the tax year, HMRC treats the loan as a taxable benefit-in-kind, unless you're paying interest at HMRC's official rate (2.25% for 2025/26).

If you're not paying interest at that rate:

• The company must file a P11D for you as director.
• You pay income tax on the benefit at your marginal rate (20%, 40%, or 45%).
• The company pays Class 1A NIC at 13.8% on the benefit.

The trap: many directors dip briefly above £10k during the year (a large personal cost, a slow month for dividends) and don't realise it triggers a P11D even if the balance is back below by year-end. The test is "at any point in the tax year", not "at year-end".

Practical fix: keep the DLA well below £10k, or formally lend the money with an interest rate at or above the official rate and document it as such.

The Section 455 tax charge

Separately, if the DLA is still overdrawn 9 months and 1 day after the company's year-end, the company pays Section 455 tax at 33.75% of the outstanding balance.

• It's the company that pays this, not you personally.
• It's refundable once the loan is repaid, but only in the corporation tax period the repayment happens, and only by claim.
• It gets reclaimed via form L2P or by adjusting the CT600.

So if you have £30,000 outstanding on the DLA 9 months after year-end, HMRC collects £10,125. You get it back once the loan is repaid, but you've parted with the cash in the meantime.

The three ways to clear an overdrawn DLA

Practical ways to zero out or reduce the balance:

1. Repay from personal funds

The cleanest option. You transfer money from your personal account into the company. No tax implications.

2. Vote a dividend

If the company has enough distributable reserves, declare a dividend, then clear the DLA with the dividend rather than paying it in cash. You pay dividend tax as normal (8.75% / 33.75% / 39.35%), but the DLA is cleared without you having to find external cash. Watch the anti-avoidance "bed and breakfasting" rules: repaying then re-borrowing within 30 days doesn't count as repayment.

3. Award a bonus

Pay yourself a formal bonus through PAYE, then use it to clear the DLA. Attracts full income tax and NIC (both employer and employee), so usually the least efficient option unless there's a specific reason (e.g. pension contribution room).

What if the company writes off the loan?

If the company formally writes off a director's loan:

• You pay income tax on the written-off amount as if it were a dividend (same 8.75% / 33.75% / 39.35% rates), plus NIC on both sides.
• The company doesn't get a corporation tax deduction for the write-off (anti-avoidance).

It's almost never the best route. Repay or clear via dividend first.

Common mistakes

• Treating the business account like a personal one. Every personal transaction becomes a DLA movement. Do it enough and the balance is opaque by year-end.
• Missing the "at any point" test on the £10k threshold. A P11D can be triggered by a two-week spike.
• Forgetting the 9-month deadline. Section 455 tax at 33.75% is expensive money to lock up.
• Not documenting a loan formally. If the company is lending you money at the official interest rate, there should be a written loan agreement and interest actually charged.
• Repaying then immediately re-borrowing. The anti-avoidance rules block this.

The rule of thumb

Keep the DLA either:

1. Slightly positive (company owes you). Best for cash flow flexibility, no tax to worry about.
2. Slightly negative and well under £10,000, cleared within 9 months of year-end. Fine for smoothing cash flow between dividend declarations.

Anything else needs deliberate planning, not "we'll sort it later".

Working with us

We review DLA balances monthly for retainer clients as part of standard management accounts, and we flag before charges hit rather than after. If yours needs untangling, or you want a clean process going forward, get in touch or see our corporation tax service.