A directors' loan account is the record of money moving between a UK limited company and its director outside salary, dividends or expenses. If it's overdrawn and unpaid nine months and one day after the accounting period ends, a 35.75% section 455 corporation tax charge can apply to loans made from 6 April 2026.
You may have reached this point without deliberately borrowing from your company. You've paid yourself a modest salary, taken dividends when profits allowed, and used the company card for a few personal purchases. Then your accountant asks about an overdrawn balance, and the accounts show that you owe the company money.
That balance isn't a private cash pot. It's a compliance-sensitive debt with possible company and personal tax consequences. The right question isn't, “Can I repay it before the deadline?” It's, “Was this the cheapest and safest way to extract the money in the first place?”
What a Directors Loan Account Is
Your company records show that you owe it £18,400. There is no bank-style loan agreement, but you drew cash, paid a personal bill from the business account or used the company card privately. Unless the payment was correctly treated as salary, a dividend, an expense or another valid transaction, it will usually belong in your directors' loan account.
A directors' loan account, or DLA, is the formal record of money moving between a UK limited company and its director outside salary, dividends and expenses. HMRC requires companies to keep this record. Its guidance on directors' loans explains that each director should have an individual account recording cash withdrawals and personal expenses paid with company money.
The balance can move in either direction:
- Money you take: Personal drawings, private purchases paid by the company and withdrawals that have not gone through payroll or been declared as dividends.
- Money you put in: Personal funds used for company bills, start-up costs or short-term working capital.
- Amounts owed either way: A credit balance means the company owes you. An overdrawn balance means you owe the company.
Why it sits outside salary and dividends
Salary goes through PAYE. Dividends are shareholder distributions from available profits, supported by the required company records. A business expense is reimbursed because you personally paid a genuine company cost. The DLA records transactions that do not properly fit those categories.
Calling a payment a “drawing” does not settle its tax treatment. The bookkeeping must show what happened, and the company must report the relevant balance in its accounts and corporation tax return where required.
Practical rule: If the company paid for something that benefited you personally, treat it as a DLA transaction until the records prove it belongs elsewhere.
Every director of a small limited company can have a DLA, including someone who never intended to borrow. A credit balance is usually simple to manage. An overdrawn balance creates a significant decision: accept the company's cash-flow support now, then deal with the tax and repayment consequences, or extract the money through salary or dividends instead.
That choice matters particularly for directors drawing between £60,000 and £200,000. The DLA may provide immediate access to cash, but it does not make personal extraction tax-free. Compare the cash benefit with the company charge, personal tax and record-keeping burden before treating the account as a convenient alternative to dividends or salary.
How a DLA Is Created and Used Day to Day
A directors loan account grows one entry at a time, but the risk sits in the balance over time. A personal purchase on the company card may seem minor. Repeated private spending can leave the company funding a sizeable amount that you must repay.
Typical DLA entries include:
Personal spending on the company card. A family meal, household purchase or private subscription remains personal because the company paid for it. Post it to the DLA unless it has a genuine connection with the trade.
A personal tax bill paid from the business account. Your self assessment liability belongs to you. If the company settles it, the payment normally increases the amount you owe through the DLA.
Cash withdrawals without payroll treatment. Money taken from the business account is not automatically salary. If payroll has not processed it and no valid dividend has been declared, record it in the DLA.
Personal direct debits from the company account. Mortgage payments, household utilities and private insurance are personal costs. Keep them out of the company's expenditure and charge them to the DLA.
The account can also run in your favour at start-up. Paying a supplier personally, introducing funds for payroll or transferring money to keep the company solvent can leave the company owing you. That credit balance may later support legitimate withdrawals, provided the bookkeeping records each contribution and repayment accurately.
The balance is cumulative
Your accountant checks the DLA at year end because it is a running account, not a set of unrelated payments. Each movement should show the date, amount, description and supporting bank evidence. Missing detail makes it harder to separate a genuine expense reimbursement from a private benefit.
Keep regular drawings under control. Salary must go through payroll. Dividends require sufficient distributable profits and the correct company paperwork. The DLA cannot replace either extraction route, and calling a payment a drawing does not change its tax treatment.
Use the account as a temporary record while you decide how each transaction should be classified. Clear private balances promptly or process the correct salary, dividend or reimbursement entry. If you are drawing regularly, review the pay structure instead of treating repeated borrowing as ordinary remuneration. For a director taking between £60,000 and £200,000, that review should compare immediate cash flow with the company charge, personal tax and repayment burden before the DLA becomes the default alternative to salary or dividends.
The Section 455 Corporation Tax Charge Explained
A director leaves £20,000 in an overdrawn DLA while the company's cash is needed for payroll and VAT. The balance may look manageable, but the company can face a second funding demand if the loan remains unpaid after the statutory deadline.
Section 455 can apply where the DLA is overdrawn at the end of the company's accounting period and remains unpaid nine months and one day after that period ends. The deadline follows the company's accounting period, not the director's personal tax return timetable.
For loans made from 6 April 2026, the section 455 rate is 35.75% of the relevant outstanding balance. See HMRC guidance on the section 455 directors' loan tax charge. The company pays this charge, not the director personally.
A £20,000 example
Assume the overdrawn DLA is £20,000 at the relevant point and remains unpaid after the deadline:
£20,000 × 35.75% = £7,150
The company therefore faces a £7,150 section 455 charge. This is usually recoverable after the loan is repaid, subject to HMRC's repayment rules and timing. It still creates a cash flow problem now.
The business has already advanced £20,000 to the director, then may need another £7,150 for HMRC. That money cannot fund suppliers, payroll, VAT or corporation tax while it is tied up in the loan and tax charge. Read this guide to how corporation tax works for wider context on company tax. Your accountant should calculate the DLA charge separately.
The company reports the position through its corporation tax return, including the relevant supplementary information on CT600A. Its corporation tax account records the payment and, later, the reclaim after repayment.
Why repayment before the deadline usually wins
Repaying before the deadline normally avoids the immediate section 455 payment. Make sure the repayment is real and documented. A withdrawal that funds the repayment can leave the same debt in place under another description.
A lawful, properly declared dividend can clear an overdrawn DLA where the company has sufficient distributable profits. The dividend needs the correct paperwork and must be recorded at the right time. Without available profits, the debt remains a debt. Do not relabel it as a dividend because the deadline is close.
For a director taking between £60,000 and £200,000, the decision is a cash flow versus tax cost calculation. Compare the section 455 charge and repayment burden with the personal tax and company cost of salary or dividends before allowing the DLA to become the default extraction method.
Benefit in Kind Rules and the £10,000 Threshold
Section 455 is only part of the cost. An overdrawn DLA can also create a personal benefit in kind for the director. The company's corporation tax charge and the director's personal tax position are separate calculations, so settling one does not automatically settle the other.
If beneficial loans exceed £10,000 at any point, the loan may be treated as a benefit in kind and reported on a P11D. See HMRC guidance on beneficial loans and the £10,000 threshold for the relevant rules. HMRC looks at the combined beneficial loans, not just each individual withdrawal. Keeping every transaction below the threshold does not necessarily avoid the issue.
For 2025/26, the official rate of interest is 3.75%. The taxable benefit is calculated using the applicable interest method, commonly based on the average loan balance where that method applies. The company should keep a clear record of drawings, repayments and balances throughout the year.
| Scenario | Average Loan Balance | Official Rate | Annual Benefit | Reported On |
|---|---|---|---|---|
| Loan below the threshold | Below £10,000 | 3.75% for 2025/26 | No beneficial-loan benefit on this threshold basis | No P11D benefit for the loan |
| Loan above the threshold | More than £10,000 | 3.75% for 2025/26 | Calculated using the applicable average balance | P11D |
Do not confuse the 30-day rule with the section 455 deadline. Repaying the loan within 30 days of the accounting period end may avoid benefit-in-kind treatment in the circumstances covered by the rules. That personal-tax rule is separate from the company's nine-month-and-one-day section 455 deadline.
Where a benefit arises, the director pays personal tax on the taxable benefit through their tax position. The company generally reports the benefit on the P11D and may owe Class 1A National Insurance. Paying or reclaiming the section 455 liability does not automatically remove the P11D exposure.
Review the highest balance, not only the year-end figure. Repeated drawings, temporary repayments and other beneficial loans can change the calculation. A reconciled ledger is safer than a rough estimate, particularly where the director regularly takes money from the company. Get specialist advice if the account has several withdrawals, repayments or connected loans.
Worked Example Comparing a Loan, Dividend and Salary
A director needs £60,000 from a company with £200,000 of post-corporation-tax profits in a 2026/27 accounting period. They are a higher-rate taxpayer. The choice is not about which route puts cash in their hands fastest. It is a cash flow decision weighed against company tax, personal tax, National Insurance and repayment risk.
An overdrawn DLA gives immediate access to the money without processing salary or declaring a dividend. That convenience can become expensive. If the full £60,000 remains unpaid beyond the company deadline, the section 455 charge alone is:
£60,000 × 35.75% = £21,450
The company must fund that temporary charge and retain evidence of any repayment. The amount may be reclaimable after the loan is cleared, but that does not make the arrangement free or remove the cash flow pressure.
A dividend uses post-tax profits and is not deductible for corporation tax. The director pays dividend tax based on their wider income and the rates applying in the relevant tax year. The company pays the cash when the dividend is declared and paid, or may credit it to the DLA if the paperwork records that treatment properly. See this guide to how dividends work in the UK for the mechanics of declaring and paying dividends.
Salary follows a different route. A genuine £60,000 gross salary is normally deductible when calculating the company's taxable profit. Employer National Insurance and payroll duties still apply. PAYE deducts the director's income tax and employee National Insurance, so the payment does not sit as an informal company debt.
| Route | Director Income Tax | Company Tax/NI | Net to Director | Cash Timing |
|---|---|---|---|---|
| Overdrawn DLA | No salary or dividend tax at the initial withdrawal, but beneficial-loan exposure may arise | Potential £21,450 section 455 charge on £60,000 if unpaid after the deadline, plus any relevant company obligations | £60,000 initially, subject to later repayment and tax consequences | Immediate draw, with repayment pressure at the company deadline |
| £60,000 dividend | Dividend tax based on the director's wider income and applicable rates | No corporation tax deduction for the dividend | £60,000 less dividend tax | Paid once lawfully declared from available profits |
| £60,000 gross salary | PAYE income tax and employee National Insurance based on the director's circumstances | Salary is generally deductible, with employer National Insurance potentially due | £60,000 less PAYE and employee deductions | Paid through payroll as salary is processed |
The company's salary saving depends on its corporation tax position and the employer National Insurance cost. A proper comparison also needs the director's other income, available allowances, payroll structure and the company's tax calculation. Without those facts, a single “winner” figure would be misleading.
My recommendation is direct: do not leave £60,000 as an informal loan. If profits are available, compare a properly declared dividend with a planned salary package. Use the DLA only as a controlled short-term bridge, backed by a written repayment plan and a tax review. Involve a specialist before drawing the money if repayment is uncertain, the balance is substantial or the company's profits and tax position are complex.
Common Mistakes Directors Make With Their DLA
A director pays a personal bill from the company account, intending to sort it out later. Weeks pass, the balance grows, and the bookkeeping still shows a loan. That is company money owed by the director, not a private overdraft.
The mistakes that cause the damage
Using the DLA for regular personal spending: Household bills, holidays and other private costs turn the account into a company receivable. A balance that looks harmless can create repayment pressure and a section 455 liability.
Confusing the company deadline with personal tax dates: The section 455 deadline is nine months and one day after the accounting period end. It is separate from the director's self assessment timetable. Waiting for 31 January can leave the company exposed. Guidance on directors' loan deadlines explains the distinction.
Treating £10,000 as a general exemption: The threshold concerns benefit-in-kind treatment. It does not authorise unlimited personal withdrawals, remove the need to record the DLA or prevent a section 455 charge on an overdrawn balance.
Labelling an old withdrawal as a dividend after the event: A dividend needs available distributable profits, a lawful declaration and supporting company records. Writing “dividend” beside an existing entry does not repair an overdrawn account.
Reclassifying transactions without fixing the records: Changing drawings into salary or dividends can create PAYE, National Insurance, dividend and corporation tax problems. The risk is higher if the company later becomes insolvent, because inaccurate records can be scrutinised alongside the company's ability to repay.
A repayment plan works only if the director can return the money. Cycling funds out and back in without a clear transaction trail may leave both the debt and the evidence problem unresolved.
Correct a small overdrawn balance early. Stop private spending through the company, review the account regularly and choose the right extraction method, payroll, a properly declared dividend or a genuine short-term loan. For entries involving the director, relatives or connected businesses, use this guide to related-party transactions and obtain specialist advice where the history is mixed, the balance is substantial or repayment is uncertain.
Compliance Steps and When to Get Specialist Help
A director who leaves the DLA until the accounts are prepared is already behind. Review it monthly, record transactions as they happen and deal with an overdrawn balance before it becomes a tax problem.
Run the account properly
Record every movement promptly. Enter the date, amount, payee, purpose and treatment, such as personal spending, business cost, salary, dividend or repayment.
Keep the evidence. Retain invoices, receipts, bank statements, card records and repayment confirmations. “Director drawing” does not explain a transaction later.
Reconcile the ledger. Match the DLA to company bank and card statements. Investigate differences before preparing the accounts.
Review the highest balance. The closing figure is not the whole story. The balance during the period can affect benefit-in-kind reporting and repayment planning.
Calculate the company deadline. Note the accounting period end and work out the nine-month-and-one-day date. Your personal tax calendar is irrelevant to this deadline.
At year end, report the overdrawn balance on the company tax return using CT600A where applicable. If section 455 applies, calculate the charge on the relevant balance and pay it through the corporation tax account. The company can reclaim it when the loan is repaid, subject to HMRC's rules.
Keep board minutes for material loans, signed dividend documents, payroll records, invoices, bank evidence and repayment receipts for at least six years. Follow this guidance on HMRC compliance checks when organising the file. Ask a specialist to review the position if the balance exceeds £10,000, drawings recur, personal and company spending are mixed, foreign currency is involved or the deadline has been missed.
Do not relabel historic withdrawals to make the ledger look tidy. An adviser should test whether a dividend was lawful, calculate company and personal exposure, document genuine repayments and set out a workable plan if immediate repayment is impossible.
Tax Compass helps limited company directors review DLA reconciliations, extraction choices and the tax treatment of salary, dividends and company loans. Use Tax Compass to organise the questions, then take them to a qualified adviser before making a large withdrawal or repayment.