What is a Director’s Loan?

Shafiq Khan • 12 June 2025

A director’s loan is when you, as the company director, make personal funds available to your limited company or borrow funds for personal use other than salaries, dividends, or repayment of expenses, provided the loan value is 10% less than the company’s net assets.

 

Taking these funds isn’t straightforward, as it may result in additional tax consequences if not properly managed. For this reason, directors using this loan must understand and consider associated tax responsibilities to comply with tax laws and the Companies Act whilst keeping the company financially stable.


What is a Director’s Loan Account (DLA)?


A Director’s Loan Account (DLA), a.k.a. Director’s Current Account (DCA), is a ledger of transactions between a director and a company, including the record of money owing in each direction (director to company or vice versa). Every director who uses this type of loan is required by law to have a DLA. The DLA would usually contain the following types of transactions;

 

  • The money a director borrows from the company for personal use, using company money or card.

  • The money a director lends to the company in the form of start-up costs, settles debts on behalf of the company, or funds company growth.

  • Loan details granted during the year, especially larger ones.

  • Interest rate (mainly at the commercial rate).

  • The primary condition of the loan.

  • Any director’s loan repaid or written off.


Difference Between Borrowing and Repaying


A director’s loan can go both ways. If necessary, you can lend your personal funds to the company, but the most frequent situation is when a director’s lending account is overdrawn. Withdrawing funds from the company puts the DLA balance in negative or in a debit position.

 

On the other hand, the DLA records the loan repayment as a credit balance, a negative number that either reduces the director’s debts or creates a balance owed to them. Generally, your goal should be to have the account in credit or zero.


When is Tax Payable? (s455 Tax)


Tax could be payable on the director’s loan, depending on when it’s repaid. The loan can be tax-free if the loan value doesn’t exceed £10,000 and is paid back within nine months and one day after your business's fiscal year ends. Note that this is also the same date the company’s corporation tax is due. Failure to repay within this window attracts a tax charge known as Section 455 corporation tax, computed at 33.75% of the remaining amount on the DLA. Also, remember that only loan advances, not the entire loan balance, are subject to S455 tax.

 

For example, if the total loan increased from £12,000 the previous year to £14,000 this year, you would only pay the S455 tax on the difference (£2,000) rather than the entire £14,000. Thankfully, the S455 tax is refundable should you clear the DLA, but it’s a time-consuming process that only happens nine months after the accounting period you paid off the loan.


What Happens When the Loan Isn’t Repaid on Time?


The standard window for a director’s loan repayment is nine months and one day before the company’s financial year-end to avoid penalties and possible HMRC scrutiny. A default in repayment triggers a S455 tax with further non-refundable interest charged until the S455 corporation tax is paid or the loan is fully repaid.

 

This is a measure to prevent directors from abusing the loan. HMRC monitors overdrawn accounts and can impose an income tax and national insurance on the value if they discover that your loan is a salary.

 

P.S: A director may withdraw funds from the DLA if there is a balance without incurring any tax obligations, like a regular bank account. But if the balance is overdrawn, a tax problem is inevitable.


Interest on Loans and Benefit in Kind Rules


A director's loan may attract interest if the company or the director decides to do so, but there are no set rules for negotiation. The amount of interest that applies is entirely discretionary for either party. However, discounted rates lower than the HMRC’s official rate (ORI) will be classified as a benefit-in-kind, and the difference will be subject to taxation. In addition, if the loan exceeds £10,000 during the tax year, a benefit-in-kind tax charge will apply unless the director is already paying the recommended interest.


The BIK must be reflected in the P11D forms, after which the company pays Class 1A Employer’s National Insurance pegged at 13.8% on the entire loan. This rate will increase to 15% for the 2025-26 tax year. The director, in turn, includes the cash value equivalent of the loan in the self-assessment tax return.


How to Avoid Problems


The crucial part of a director’s loan is keeping accurate records. All borrowings, repayments, and interest charges, including regular updates to reflect the account’s current status, must be logged to ensure transparency and compliance. An overdrawn DLA is a warning indicator for the viability of your business and to HMRC. Any persistently negative figure signals financial mismanagement and could draw unnecessary attention from tax officials, possibly resulting in legal action. To avoid these problems, have a sound repayment plan when you borrow, one that guarantees your payback obligations. You can also get help from a tax accountant with establishing and administering a DLA to navigate the complexities of the loan rules, paperwork, and best practice.


Is Local Knowledge Needed for a Director’s Loan?


Of course. The director’s loan requires indigenous knowledge as it can greatly impact reporting a company’s financial standing in the UK or elsewhere. Its effects extend beyond transactions to financial statements, altering balance sheets and possibly influencing tax obligations.

 

Managing director’s loan requires adherence to the Companies Act of 2006. And breaking such rules may result in severe penalties, such as HMRC classifying the loan as an unlawful dividend, and additional obligations and penalties may arise from such dividends. Getting professional guidance from a Leicester-based accounting expert, like Bloom Accounting, is strongly advised to manage these issues and ensure your company stays protected.


Wrap Up


The DLA can be cumbersome for a company director to comprehend. Taking out funds from limited companies is an entirely different situation from sole traders and partnerships, where the act and procedure is straightforward.

 

While a director’s loan offers a flexible and accessible way to obtain funds, its laws can be stringent and expensive, hence not a reliable withdrawal option you can regularly use to obtain cash for personal use. Contact Bloom Accounting for additional information on managing a director’s loan; our experts will happily answer your enquiries.

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by Shafiq Khan • 7 April 2025
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by Shafiq Khan • 28 January 2025
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