Director’s Loan Accounts: What Are They?

Director’s Loan Accounts sound far more complicated than they really are. They also tend to appear in conversations at the exact moment a director says something like:

👉 “I just transferred a bit over to my personal account…”

👉 “I paid for that personally, can the company pay me back?”

👉 “It’s my company, surely I can just take money out?”

And this is exactly where the Director’s Loan Account (DLA) comes in although you might also hear them called:

• A Director’s Loan Account

• A DLA

• A Director’s Current Account

Let’s demystify what they are, how they work, and what directors need to be aware of because while DLAs are incredibly useful, they can also cause tax headaches if not handled properly.

What is a Director’s Loan Account?

In simple terms a Director’s Loan Account records money moving between a director and their company outside of salary, dividends, or expenses.

It tracks:

• Money the director puts into the company

• Money the director takes out of the company

• Personal costs paid by either side

Think of it as a running tab between you and the business.

Why does it exist?

A limited company is a separate legal entity to it's directors meaning: The company’s money is not automatically your personal money even if you own the company. So whenever money moves between the company and you personally it needs recording somewhere. That “somewhere” is the Director’s Loan Account.

How does it work in practice?

There are two main scenarios.

1. The company owes the director

This happens when the director puts money into the business.

• Paying for business expenses personally

• Putting personal funds into the company bank account

• Covering startup costs personally

Example

Emma pays £500 for software using her personal card. The company now owes Emma £500.

That sits as credit balance on the DLA meaning the director is owed money by the company.

Good news about this situation

If the company owes you money:

• You can usually repay yourself tax-free

• Because it’s simply paying back money you already spent

No tax drama. No problem.

2. The director owes the company

This is the one people need to watch more carefully. This happens when a director takes money out of the company that isn’t salary, dividend or expense reimbursement. For example:

• Transferring money to personal account

• Paying personal bills from the company bank account

• Taking cash drawings-style from a limited company

Example

A director transfers £2,000 from the company account to their personal account.

If there’s no salary or dividend to cover it therefore the DLA becomes overdrawn meaning the director owes the company money.

This is where confusion happens

Many owner directors naturally think “It’s my business, so it’s my money.” Legally, the company and the individual are separate which means taking money from the company without properly recording it creates a loan.

What does “overdrawn” mean?

An overdrawn DLA means the director owes money back to the company.

This can happen gradually over time through:

• Personal spending

• Ad hoc transfers

• Paying personal costs from the business account

Sometimes directors don’t even realise it’s happening until year end. Let's look at why overdrawn DLAs matter and where tax can enter the picture.

Section 455 Tax

If a Director’s Loan Account remains overdrawn more than 9 months after the company year end, the company may have to pay additional tax called Section 455 tax. This is currently charged at:

• 33.75% of the outstanding loan balance

Yes, really!

Example

Director owes company £10,000 at year end. Nine months later, it still hasn’t been repaid.

Potential Section 455 tax = £3,375

The company can usually reclaim this later once the loan is repaid but it can still create a nasty cashflow surprise.

Benefit in Kind implications

There’s another potential issue. If the director owes the company more than £10,000 and no interest is charged HMRC may treat this as a Benefit in Kind (BIK) meaning:

• The director may pay personal tax

• The company may pay Class 1A NIC

• It may need reporting on a P11D

All because the company has effectively provided a cheap or interest-free loan.

How do DLAs appear in the accounts?

Director’s Loan Accounts usually sit on the balance sheet.

If the company owes the director:

👉 It appears as a liability (money owed out)

If the director owes the company:

👉 It appears as an asset (money owed in)

This is why accountants pay close attention to them at year end.

Common situations that affect DLAs

✔ Paying for company expenses personally

Usually creates a credit balance.

✔ Taking money temporarily

Can create an overdrawn balance.

✔ Paying personal bills through the company

Very common and often forgotten.

✔ Dividends or salary posted later

These may reduce or clear an overdrawn balance.

Common mistakes directors make

❌ Treating the company bank account like a personal account

This is probably the biggest one.

❌ Not tracking personal spending

Small transactions add up surprisingly quickly.

❌ Assuming profits = available cash

You can have profits on paper but not enough cash available.

❌ Ignoring the DLA until year end

This is how unexpected tax issues appear.

A quick real-world example

A director:

• Takes occasional personal transfers throughout the year

• Pays for holidays from the company account

• Assumes dividends later will “sort it all out”

By year end the DLA is £18,000 overdrawn!

Potential issues:

• Section 455 tax

• Benefit in Kind reporting

• Cashflow pressure to repay it

All from transactions that seemed harmless individually.

So what should directors do?

✔ Keep personal and company spending separate

Life becomes much easier.

✔ Monitor your DLA regularly

Don’t wait until year end.

✔ Speak to your accountant before taking large amounts

Especially outside salary and dividends.

✔ Record everything properly

The bookkeeping matters here.

Final thoughts

Director’s Loan Accounts aren’t something to fear. In fact, they’re incredibly useful and completely normal in owner-managed businesses. Remember they need:

• Monitoring

• Understanding

• Proper bookkeeping

Because while a DLA can be a flexible tool, the company bank account still isn’t a personal ATM and the earlier you understand how it works, the easier it is to avoid unpleasant surprises later.