What is a director’s loan and how do I account for it?
Running a limited company offers flexibility when it comes to managing money, including how directors can take or put money into the business. One of the common financial tools used in small companies is the director’s loan. It sounds simple, but it comes with rules, tax implications, and bookkeeping requirements that every director should understand.
What Is a Director’s Loan?
A director’s loan happens when a company director takes money out of the business that isn’t:
A salary or wage
A dividend
A legitimate business expense reimbursement
It also applies in the opposite direction — if the director puts their own personal money into the company, that’s also treated as a director’s loan, but the company owes the director.
In simple terms, it’s any money moving between the director and the company that isn’t part of normal pay or dividends.
Common Examples of Director’s Loans
The company pays for something personal for the director.
The director takes out cash from the business bank account for personal use.
The director transfers personal funds into the company to help with cash flow.
The company pays a bill on the director’s behalf that isn’t a business cost.
The Director’s Loan Account (DLA)
To keep track of these movements, companies use a Director’s Loan Account (DLA) in their bookkeeping. This is a running balance that records all transactions between the director and the company.
If the director borrows from the company, the DLA goes overdrawn (i.e., the director owes the company).
If the director lends to the company, the DLA is in credit (i.e., the company owes the director).
How Does the Director’s Loan Affect Tax?
If You Owe the Company (Overdrawn DLA)
There are tax rules that apply if you borrow money from your company and don’t repay it promptly.
If the loan isn’t repaid within 9 months of the company’s year-end, the company must pay extra Corporation Tax called Section 455 tax, which is 33.75% of the outstanding loan amount.
This tax is repayable to the company once the loan is repaid.
Benefit in Kind
If the loan is over £10,000 at any point in the year and no commercial interest is charged, it is treated as a benefit in kind for the director. This means:
The director pays personal tax on the benefit.
The company pays Class 1A National Insurance on the benefit.
If the Company Owes You (DLA in Credit)
If the director has lent money to the company, the good news is:
There are no tax charges on the loan itself.
The director can be repaid the amount at any time.
The company can even pay the director interest, which is taxable for the director but a deductible expense for the company.
How Can a Director Repay an Overdrawn Loan?
Repay the money in cash or transfer it back to the company bank account.
Declare dividends (if profits allow) and use them to clear the loan.
Salary adjustments, where future salary is offset against the loan.
It’s important to ensure that dividends are lawful (i.e., the company has sufficient retained profits). Illegal dividends can’t be used to clear loans.
What If the Loan Isn’t Repaid?
If the director doesn’t repay the loan within the 9-month window after the year-end:
The company must pay Section 455 tax (33.75%) on the outstanding amount.
This tax is refunded, but only after the loan is eventually repaid or written off.
If the company writes off the loan (decides not to ask for repayment):
It’s treated as income for the director, similar to a dividend or salary.
The director may have to pay personal tax on the written-off amount.
Record Keeping Requirements
HMRC expects accurate records of:
All amounts loaned to and from directors
Dates and amounts of repayments
Whether interest was charged on the loan
Any relevant agreements or terms for repayment
Failing to keep clear records can lead to disputes, incorrect tax calculations, or HMRC penalties.
Common Mistakes with Director’s Loans
Assuming small withdrawals don’t matter. Even £5 withdrawn for personal use counts as part of the DLA.
Using dividends to clear the loan when there are no profits. This can result in illegal dividends.
Forgetting the £10,000 benefit-in-kind rule. Going over this without charging interest can lead to surprise tax bills.
Not tracking cumulative small transactions. Lots of little withdrawals add up quickly.
Is a Director’s Loan the Same as a Dividend?
No. Dividends are distributions of company profits to shareholders. They are subject to dividend tax but don’t need to be repaid.
A director’s loan is borrowing — it creates a debtor/creditor relationship between the director and the company. Unless cleared by salary or dividends, it must be repaid.
Summary: What You Need to Know
A director’s loan is money taken from or lent to the company that isn’t salary, dividends, or expenses.
If the director borrows from the company and doesn’t repay within 9 months of the year-end, the company pays extra Corporation Tax (33.75%).
Loans over £10,000 can trigger personal tax charges unless interest is charged.
If the director lends money to the company, it’s straightforward — the company can repay anytime.
Keep accurate records of all transactions in the Director’s Loan Account (DLA).
It’s essential to manage the DLA carefully to avoid tax penalties or cash flow issues.
