Directors’ Loan Accounts Explained: Rules, Risks & Tax

June 8, 2025

As the director of a limited company, it’s common to use personal funds for business needs or even borrow money from the business for personal reasons. These transactions are tracked using a Director’s Loan Account (DLA). But while DLAs are flexible, they can also lead to tax complications if not managed carefully.

This guide explains everything you need to know about Director’s Loan Accounts, including what they are and the relevant tax rules.

What is a Director’s Loan Account?

A Director’s Loan Account records all financial transactions between a director and their company that don’t fall under salary, dividends, or reimbursed expenses. It’s a running tally of money:

You’ve lent to the company (credit balance)
You’ve borrowed from the company (debit balance)

What Should a Director’s Loan Account Contain?

The DLA should clearly record:

Money borrowed by the director
Money lent by the director
Repayments made
Interest charged or received (if any)
Relevant dates for each transaction

Accurate record-keeping is essential, ideally supported by professional accounting software.

What are the Interest Rates on Director’s Loan Accounts?

If the company lends money to the director: HMRC sets an official rate of interest (3.75% as of 2025/26). If no interest or a lower rate is charged, the benefit is taxable as a Benefit in Kind (BiK).
If the director lends money to the company: You may charge interest, which is a tax-deductible expense for the company. However, the company must deduct 20% tax at source and file a CT61.

What is a Director’s Loan?

A Director’s Loan occurs when you take money out of the company that isn’t:

A salary or dividend
A reimbursement for expenses
A return of capital you invested

These are treated as loans from the company to you and are subject to specific tax rules if they’re not repaid promptly.

What is the Maximum Amount You Can Borrow Through a Director’s Loan?

There is no legal limit on how much you can borrow. However:

Loans over £10,000 are treated as benefits in kind and must be reported to HMRC.
For large or repeated loans, consider the optics and tax impact—it may raise a red flag with HMRC.

When Do You Need to Repay a Director’s Loan?

To avoid extra tax, loans must be repaid within 9 months and 1 day after the company’s year-end.

If a director’s loan is not repaid within 9 months and 1 day after the end of the accounting year, the company must pay Section 455 tax at 33.75% of the outstanding balance. This tax is reclaimable, but only 9 months after the end of the accounting period in which the loan is repaid.

What is an Overdrawn Director’s Loan Account?

Your DLA is overdrawn when you owe money to the company, i.e., you’ve taken out more than you’ve put in. This becomes an issue if the balance remains unpaid beyond the allowed period.

What Are the Tax Implications of an Overdrawn Director’s Loan Account?

If your Director’s Loan Account (DLA) is overdrawn — meaning you owe money to your company, there can be significant tax implications, especially if it’s not repaid promptly.

Section 455 Tax
If the loan isn’t repaid within 9 months and 1 day after the end of the company’s accounting year, the company must pay Section 455 tax at 33.75% of the outstanding loan amount.
This tax is reclaimable, but only after the loan is fully repaid and 9 months have passed following the end of the accounting period in which repayment occurred.
Benefit in Kind (BiK)
If the total amount borrowed exceeds £10,000 at any point during the tax year, and you don’t pay interest at HMRC’s official rate (currently 3.75%), the loan is treated as a Benefit in Kind.
You must pay income tax on this benefit through your Self Assessment return.
The company must report the benefit on a P11D form.
Class 1A National Insurance Contributions
The company must pay Class 1A National Insurance (currently 15%) on the taxable benefit value.
This applies only if the loan is considered a Benefit in Kind, i.e., over £10,000 and insufficient interest charged.

How to Manage an Overdrawn Director’s Loan Account?

To avoid penalties:

Repay the loan before the 9-month deadline.
Declare the benefit properly on a P11D if required.
Charge appropriate interest on loans exceeding £10,000.
If you can’t repay in time, speak to an accountant about options.

Are You Allowed to Re-Borrow After Repaying a Director’s Loan?

This practice is commonly known as “bed and breakfasting” and is closely monitored by HMRC. It’s an anti-avoidance measure to prevent directors from temporarily repaying a loan just before the 9-month deadline — and then taking out the same amount again shortly after, to avoid Section 455 tax.

HMRC’s 30-Day Rule:

If you repay a director’s loan and borrow again within 30 days, HMRC may treat the repayment as if it never happened, up to the amount of the new loan.
This means the original loan will still be subject to Section 455 tax — defeating the purpose of the temporary repayment.

How to Avoid It:

Wait at least 30 days before taking out another loan for the same amount.
Or, make sure the repayment is from a genuine source (e.g., salary, bonus, or dividend), not another loan from the company.

Can a Director’s Loan Be Written Off?

Yes, but it’s not tax-free.

The company can write off the loan.
However, the written-off amount is treated as income and subject to income tax on your part.
It’s also subject to National Insurance Contributions.

Tax Implications of a Written-Off Director’s Loan

For the director: Taxed like a dividend or employment income, depending on circumstances.
For the company: The written-off amount cannot be claimed as a business expense.

What Happens If Your Director’s Loan Account Is In Credit?

If the company owes you money:

No tax implications apply.
You can withdraw the money tax-free.
You may charge interest, which the company must account for properly (CT61 submission and tax deduction at source).

Conclusion

Directors’ Loan Accounts are a useful way to manage cash between you and your business, but they come with strict tax rules, especially when borrowing from the company. With good record-keeping and professional advice, DLAs can be managed effectively and transparently. Need help managing your Director’s Loan Account? Reach out today for professional accounting support and compliance advice.