If you’re running a limited company, chances are you’ve heard the term Director’s Loan Account (DLA). But what exactly is it? Whether you're a seasoned business owner or a new director, understanding how DLAs work is essential to managing your company finances lawfully and efficiently.
What Is a Director’s Loan Account?
A Director’s Loan Account is a financial record in a company’s books that tracks the money a director owes to the company, or that the company owes to the director, outside of their usual salary, dividends, or expenses.
Think of it as a current account between the company and its director(s).
The Two Main Scenarios:
Director lends money to the company
This might happen when the company is short on cash and the director uses personal funds to support it. In this case, the company owes money to the director. This is a credit balance.Director borrows money from the company
This is more common in small owner-managed businesses. If a director takes money out of the company that isn’t a salary, dividend, or reimbursed expense—and it’s not being repaid promptly—it’s classed as a director’s loan. This is a debit balance.
Why Does It Matter?
Under UK company law and HMRC regulations, there are clear rules around DLAs, especially when the director owes the company money.
Key Legal and Tax Implications
Corporation Tax on Overdrawn DLAs:
If the director owes the company more than £10,000 at any point in the accounting period and doesn’t repay it within 9 months of the company year-end, the company may have to pay Section 455 tax at 33.75% of the outstanding loan. This tax is repayable by HMRC once the loan is repaid.Benefit in Kind (BiK):
If the loan exceeds £10,000 at any time and isn’t charged interest at HMRC’s official rate, it’s treated as a benefit in kind. The director will have to pay personal tax on it, and the company will owe Class 1A National Insurance.Write-offs and Waivers:
If a company writes off a director’s loan, it’s treated as income and is taxed accordingly, often as a dividend or earnings, depending on the circumstances.
Record Keeping Requirements
Companies are legally required to maintain accurate financial records, including all director transactions. The DLA should be part of the accounting system and must be included in the company’s annual accounts filed with Companies House.
Best Practices for DLAs
Avoid mixing personal and business expenses.
Document every loan or repayment with board minutes or agreements.
Repay loans promptly to avoid tax penalties.
Consult with an accountant or tax advisor if in doubt.
Final Thoughts
While a Director’s Loan Account can be a useful tool for flexible finance within your company, it must be managed carefully to avoid tax penalties and ensure compliance with UK law. If you regularly take money out of your company, make sure you're aware of the limits, timelines, and reporting obligations. The best approach? Keep good records, stay within the rules, and seek professional advice when needed.
Photo by Jakub Żerdzicki on Unsplash
