If you’re a director of a UK limited company, now is the perfect time to review your Director’s Loan Account (DLA). Many business owners overlook this vital area, but failing to monitor your DLA can lead to unexpected tax charges, HMRC scrutiny, and cash flow issues.
At Bidwell Accountancy Ltd, we regularly help clients understand their DLA and avoid costly tax pitfalls. Here’s what you need to know.
What Is a Director’s Loan Account?
A Director’s Loan Account is a record of financial transactions between you and your limited company that are not salary, dividends, or reimbursed expenses.
It tracks:
Money you borrow from the company
Money you personally put into the business
Personal expenses paid using company funds
Reimbursement of genuine business expenses you’ve covered personally
If the company owes you money, the account is in credit.
If you owe the company money, the account becomes overdrawn—and that’s where HMRC gets interested.
The Tax Implications of an Overdrawn Director’s Loan Account
An overdrawn DLA isn’t unusual, but it does come with tax consequences if not cleared on time.
1. Section 455 Tax at 33.75%
If your Director’s Loan Account remains overdrawn nine months after your company’s year-end, your company must pay Section 455 tax at 33.75% of the outstanding balance.
Example:
An overdrawn balance of £10,000 = £3,375 additional corporation tax.
Although this tax can be reclaimed once the loan is repaid, the repayment is often delayed by HMRC until the end of the accounting period in which repayment occurs—meaning the company may wait over a year for the refund.
2. Benefit-in-Kind Charges for Loans Over £10,000
If your overdrawn DLA exceeds £10,000 at any point during the tax year, and no interest is charged, HMRC treats this as a benefit in kind.
This results in:
Personal income tax for the director
Class 1A National Insurance for the company
This can significantly increase your overall tax liability, particularly if you regularly draw funds without formalising dividends or salary
3. Cash Flow and Dividend Issues
An overdrawn DLA can restrict your future ability to:
Pay dividends legally
Obtain personal finance (mortgage lenders often review DLA balances)
Maintain healthy company cash flow
Avoid HMRC investigations
If your company does not have enough distributable profits, withdrawing money as “informal dividends” can push your DLA further into the red.
Why You Should Review Your DLA Now
A proactive review of your Director’s Loan Account before the year-end can:
Prevent unnecessary Section 455 tax charges
Avoid benefit-in-kind issues
Help you plan dividends correctly
Improve tax efficiency
Strengthen your company’s financial position
Reduce the risk of HMRC enquiries
Now is the ideal time to make sure your DLA is accurate and compliant.
How Bidwell Accountancy Ltd Can Help
At Bidwell Accountancy Ltd, we support directors and small business owners across Milton Keynes and beyond. Our services include:
Reviewing your Director’s Loan Account
Identifying tax risks and solutions
Advising on safe and tax-efficient ways to take money out of your business
Planning ahead for year-end and dividend strategies
Whether you're unsure about your current DLA position or want to prevent problems before they occur, we're here to help.
Need help reviewing your Director’s Loan Account?
Contact Bidwell Accountancy Ltd today for friendly, professional advice tailored to your business.
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