A director's loan account is one of the most misunderstood aspects of running a limited company. It is not a bank account, a salary vehicle, or a flexible reserve — it is a running ledger of the financial relationship between you and your company. Drawing money from it without classifying it correctly creates tax liabilities that are easy to avoid with basic bookkeeping, and expensive to fix once they are discovered.
- Overdrawn DLA not cleared by 9 months after year-end: S455 tax at 33.75%
- S455 is refundable when the loan is repaid — but HMRC takes up to 9 months to repay it
- Loan balance over £10,000: benefit-in-kind arises if interest not charged at official rate
- Credit DLA balance: draw down tax-free at any time
- Write-off of DLA: treated as employment income — full PAYE/NI applies
What is a director's loan account?
The director's loan account (DLA) is a running balance in the company's books recording all transactions between the director personally and the company, excluding salary, dividends, and properly recorded expense reimbursements.
Common DLA transactions:
| Transaction | DLA effect |
|---|---|
| Director takes cash from company bank (not salary or dividend) | DLA overdrawn (you owe company) |
| Director pays personal expense from company account | DLA overdrawn |
| Director lends own money to the company | DLA in credit (company owes you) |
| Director pays expenses personally and is not reimbursed | DLA in credit |
| Salary paid and processed through payroll | Does not affect DLA |
| Dividend declared and paid | Does not affect DLA |
Overdrawn DLA: the Section 455 tax charge
If the DLA is overdrawn at the company's accounting year-end and the balance is not cleared within 9 months and 1 day of that year-end, the company must pay a Section 455 tax charge:
| Item | Detail |
|---|---|
| S455 rate | 33.75% of the outstanding overdrawn balance |
| When due | Same deadline as corporation tax: 9 months + 1 day after year-end |
| Is it permanent? | No — S455 is repayable by HMRC when the loan is fully repaid |
| Repayment timing | HMRC repays approximately 9 months after the accounting period in which the loan was repaid |
Worked example: S455 tax
Company year-end: 31 March 2026. Director's DLA: overdrawn by £30,000 at 31 March. Loan not cleared by 1 January 2027 (9 months + 1 day).
| Item | Amount |
|---|---|
| S455 tax charge (£30,000 × 33.75%) | £10,125 |
| Due date | 1 January 2027 |
| If loan repaid in April 2027 | S455 refundable — repayment arrives ~January 2028 |
| Cash cost of waiting 12 months for S455 repayment | £10,125 tied up for ~15 months total |
S455 is a cash flow trap: Even though S455 is eventually refundable, the timing gap can be 15–18 months. A £30,000 overdrawn DLA creates a £10,125 tax bill now, and the refund only arrives well over a year later when the loan is repaid. This is a significant cash-flow cost — avoid letting DLAs stay overdrawn across year-end.
The £10,000 benefit-in-kind threshold
A separate tax charge applies if the DLA is overdrawn by more than £10,000 at any point during the tax year and the company does not charge you interest at HMRC's official rate (currently 2.25% for 2026-27).
The taxable benefit-in-kind (BIK) is the notional interest — what you would have paid at the official rate minus what you actually paid. This is reported on a P11D and subject to income tax at your marginal rate:
| Loan balance (average) | Official rate 2.25% | BIK (if no interest charged) | Income tax (at 40%) |
|---|---|---|---|
| £10,000 | £225 | £225 | £90 |
| £25,000 | £563 | £563 | £225 |
| £50,000 | £1,125 | £1,125 | £450 |
The BIK is relatively modest unless the loan is very large. But it must still be reported correctly on a P11D — failure to do so is a compliance error.
Clearing an overdrawn DLA: options
| Method | How it works | Tax consequence |
|---|---|---|
| Declare a dividend | Dividend offsets DLA balance | Dividend tax at standard rates applies personally |
| Pay a salary/bonus | Salary processed through payroll offsets balance | PAYE and NI applies on the salary |
| Repay cash to company | Wire money from personal account back to company | No tax — it's a repayment of the loan |
| Company writes off the debt | Company forgives what you owe | Write-off treated as employment income — full PAYE/NI on the amount written off |
Clearing the DLA by declaring a dividend before year-end is the most common approach — it is tax-efficient and eliminates the S455 risk cleanly.
Credit DLA: drawing down tax-free
If your DLA is in credit (the company owes you money — because you have lent it money or paid costs on its behalf), you can draw down that credit at any time without any tax consequence. It is a repayment of your own money. This is different from salary or dividends and does not trigger income tax or NI.
Many directors build up credit DLA balances early on (e.g., by paying formation costs personally) and later draw these down before salary or dividends — a tax-free withdrawal.
Bed and breakfasting: the 30-day rule
HMRC has an anti-avoidance rule for DLAs: if you repay an overdrawn DLA to avoid S455, then re-borrow the same amount within 30 days, HMRC ignores the repayment and treats the DLA as still overdrawn. Known as "bed and breakfasting", this prevents artificial clearance just before the S455 deadline.
Use the calculator
Frequently asked questions
Can I have a credit balance on my DLA?
Is there tax on a company loan below £10,000?
Can the company charge me interest on the loan?
What if the company is wound up with an outstanding overdrawn DLA?
How often should I review my DLA balance?
Important: This guide is for general information only and does not constitute tax or legal advice. Tax rules change — always verify current rates and thresholds with HMRC or a qualified accountant before making decisions.