Understanding Overdrawn Director’s Loan Accounts

Posted on 21st July 2025

Understanding Overdrawn Director’s Loan Accounts – And Why It Matters

For many small and medium-sized UK companies, director’s loan accounts (DLAs) are a normal part of running the business. However, it’s crucial to understand the risks and consequences of allowing a director’s loan account to become overdrawn — and to remain that way.

In this post, we’ll explain what an overdrawn DLA is, what it means for the company, and how to avoid unexpected tax bills and penalties.

What is a Director’s Loan Account?

A director’s loan account records all money a director takes out of a company (other than salary, dividends, or reimbursed expenses) and all money they put in, such as personal funds lent to the business.

At the end of your company’s financial year, if you have withdrawn more than you’ve put in, the account is said to be overdrawn.

In other words, you owe the company money.

Why is an Overdrawn DLA a Problem?

Having a small overdrawn balance for a short time is not unusual — but leaving it overdrawn, or letting the balance build up, can have serious tax and cash flow implications.

Here are the main issues to be aware of:

1. Corporation Tax Charge (S455)

If the loan is not repaid within nine months and one day after the end of the company’s financial year, HMRC charges the company an additional corporation tax of 33.75% (2024/25 rate) on the outstanding loan balance.

This is called a Section 455 tax charge.

The good news is that once the loan is repaid, you can reclaim this tax — but it can take a long time for HMRC to process repayments, so your cash flow can take a hit in the meantime.

2. Benefit in Kind for the Director

If the loan is more than £10,000 at any point in the tax year and no interest (or less than the HMRC official rate) is charged, the director is treated as receiving a benefit in kind.

This means:

The company must report it on a P11D.

The director pays income tax on the benefit.

The company pays Class 1A National Insurance.

3. Impact if the Company Becomes Insolvent

If the company gets into financial difficulty, an overdrawn DLA can become a personal liability.

The director may have to repay the amount to help settle the company’s debts.

How to Avoid Problems

✅ Plan ahead: Before taking money out of the company, check your loan account balance.

✅ Declare dividends properly: If the company has sufficient retained profits, paying dividends can be a tax-efficient way to clear an overdrawn loan.

✅ Repay on time: Try to repay any overdrawn balance within the nine-month window to avoid the S455 charge.

✅ Charge interest where appropriate: If the loan exceeds £10,000, consider charging interest at least at HMRC’s official rate to avoid the benefit in kind.

✅ Speak to your accountant: Always get advice if you’re unsure of the best way to draw funds from your company.