09 Jul What Is a Director’s Loan Account : and Why Does It Matter?
For many small business owners, the line between "my money" and "the company's money" can sometimes feel a little blurry. After all, it’s your business, you do the work, and you’re the one making the decisions. However, from a legal and tax perspective, a Limited Company is a separate entity entirely.
This is where the Director’s Loan Account (DLA) comes in. It is one of those accounting terms that can sound a bit intimidating, but it is actually a vital tool for managing your finances. If handled correctly, it's a helpful record; if ignored, it can lead to some unexpected (and expensive) tax bills.
In this guide, we’ll break down exactly what a DLA is, how it works in 2026, and why understanding the Section 455 tax rate is essential for every director.
What exactly is a Director’s Loan Account?
Think of your DLA as a running scorecard between you and your company.
Whenever you take money out of the business that isn't a salary payment, a dividend, or a reimbursement for an expense you’ve already paid for, it is recorded in the DLA. Similarly, if you pay for company equipment out of your own pocket or lend the business some cash to help with a purchase, that also goes into the DLA.
At any given time, your DLA will be in one of two states:
- In Credit: The company owes you money. This often happens when you first start a business and put your own savings in to get things moving.
- Overdrawn: You owe the company money. This happens if you’ve taken more out than you’ve put in (excluding salary and dividends).
As a limited company accountant, we often see directors getting anxious when they hear the word "overdrawn," but it's a very common part of running a business. The trick is simply knowing how to manage it.
Why does it matter if my account is overdrawn?
Being overdrawn isn't "bad" in itself, but it does have specific tax rules.
HMRC is perfectly fine with you borrowing money from your company, provided you follow the rules. However, they want to make sure that directors aren't using these loans as a way to avoid paying Income Tax on salaries or dividends.
If your DLA remains overdrawn at the end of your company’s financial year, a timer starts ticking. You generally have 9 months and 1 day from the end of your accounting period to pay that money back. If you don’t, the taxman steps in.
The 35.75% Section 455 Tax Rate
If you don't repay the loan within that 9-month window, your company has to pay a special tax known as Section 455 tax.
For the 2026/27 tax year, this rate is a significant 35.75%. This rate is intentionally high: it's linked to the higher rate of dividend tax: to discourage directors from leaving loans outstanding indefinitely.
So, if you borrowed £10,000 and didn't pay it back in time, your company would owe HMRC an extra £3,575 in tax. While you can eventually claim this tax back once the loan is repaid, the process is slow, and it can create a massive hole in your company's cash flow in the meantime. You usually have to wait until nine months after the end of the accounting period in which the loan was repaid to get your money back from HMRC!
When the loan becomes a "Benefit in Kind"
It’s not just the company that might face a tax bill; you might too.
If your overdrawn director’s loan exceeds £10,000 at any point during the tax year and you aren't paying the company interest on that loan (at the official rate set by HMRC), it is considered a "Benefit in Kind."
Because the company is giving you an interest-free loan, HMRC views this as a perk of your job. This means:
- You will have to report it on a P11D form.
- You will likely have to pay personal Income Tax on the "value" of that interest.
- The company will have to pay Class 1A National Insurance.
This is why many directors try to keep their loan balance below the £10,000 threshold or ensure they pay it back quickly. As a small business accountant, we help our clients monitor these balances throughout the year so there are no nasty surprises come April.
Clearing the loan: Dividends vs. Salary
So, how do you actually "pay back" an overdrawn DLA?
Most directors don't actually write a personal cheque back to the company. Instead, they clear the loan by declaring a dividend or a salary bonus.
- Dividends: If the company has enough post-tax profit, you can declare a dividend. Instead of receiving the cash in your personal bank account, the money is "credited" to your DLA, reducing the amount you owe.
- Salary/Bonus: You can pay yourself a bonus through the payroll. Again, instead of taking the cash, you use the net amount (after tax and NI) to offset your loan.
Choosing between these two options depends on your personal tax threshold and the company's profitability. This is exactly the kind of business advice and support we provide to our clients in Biggleswade and beyond. We help you crunch the numbers to see which method is the most tax-efficient for your specific situation.
Special considerations for the Media and Entertainment Industry
Many of our clients work in TV and Film, where income can be "lumpy." You might have a big contract pay out one month and then have several months of prep or downtime.
During those quiet periods, it’s tempting to dip into the company account to cover personal living costs. If you do this, your DLA will grow quickly. For those in media businesses, it is particularly important to stay on top of your bookkeeping. Using a tool like Xero ensures that you aren't guessing how much you owe the company, preventing a massive Section 455 bill that could wipe out the profits from your next big project.
Common pitfalls to avoid
Managing a DLA isn't overly complicated, but there are a few traps that people fall into:
1. Treating the company bank account like a personal one
It’s easy to grab the wrong card at the supermarket or use the company account for a quick personal purchase. While this is easily recorded in your DLA, doing it too often makes your bookkeeping messy and increases the risk of accidentally going over that £10,000 limit.
2. "Bed and Breakfasting"
Some directors try to get clever by repaying the loan just before the 9-month deadline and then immediately withdrawing the money again a few days later. HMRC has strict "anti-avoidance" rules against this. If you withdraw the money again within 30 days, they will often treat it as if you never paid the loan back in the first place, triggering that 35.75% tax charge.
3. Forgetting to record "money in"
Sometimes directors pay for business software, travel, or equipment on their personal credit cards and forget to tell their accountant. This means your DLA looks more overdrawn than it actually is! Keeping your receipts organized is the best way to keep your loan account balanced.
How we take the stress out of your accounts
You don't have to be a tax expert to stay on the right side of HMRC.
At Harrison’s Accountancy, we are Xero Cloud Experts with Platinum Champion status. This means we use real-time data to see exactly what is happening with your Director's Loan Account. Instead of waiting until the end of the year to tell you that you owe a fortune in Section 455 tax, we can spot trends early and give you proactive advice.
Whether you are a consulting business, a sole trader thinking of forming a limited company, or an established media agency, we act like your own CFO. We’ll help you decide:
- Whether it’s better to clear your DLA with a dividend or a salary bonus.
- How to structure your withdrawals to stay below the £10,000 "Benefit in Kind" limit.
- When the 9-month deadline is approaching so you can plan your cash flow accordingly.
Summary: Your DLA Checklist
If you take one thing away from this guide, let it be this: The Director's Loan Account is a tool, not a trap. As long as you keep an eye on it, it can be a very flexible way to manage your personal and business finances.
- Check your balance monthly: Use software like Xero to stay updated.
- Keep it under £10,000: To avoid personal tax and P11D filings.
- Watch the clock: Ensure any overdrawn balance is cleared within 9 months of your year-end.
- Document everything: Make sure your accountant knows when you’ve put personal money into the business.
Ready to get your accounts in order?
If the thought of Section 455 tax or overdrawn accounts makes you lose sleep, we can help. We specialize in making the complex simple, so you can focus on growing your business while we handle the numbers.
Contact Harrison’s Accountancy today for a friendly chat about your business needs.
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