Director's Loan Account: Tax Implications Explained

What is a director's loan account?

The director's loan account (DLA) tracks all money flowing between you and your company that is not salary, dividends, or expense reimbursements. If you take money from the company and it is not categorised as one of those, it goes on the DLA as a loan from the company to you.

Overdrawn DLA: the S455 tax charge

If your DLA is overdrawn (you owe money to the company) at the company's year-end, and that balance is not cleared within 9 months and 1 day of the year-end, the company must pay a Section 455 tax charge equal to 33.75% of the outstanding balance.

S455 tax is not permanent — it is repayable by HMRC when the loan is repaid. But it represents a significant cash-flow cost, and the repayment can take 9 months to arrive after clearing the loan.

The £10,000 benefit-in-kind threshold

If your 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, a taxable benefit-in-kind (BIK) arises. The BIK is the notional interest on the loan — reported on a P11D and subject to income tax at your marginal rate.

Clearing an overdrawn DLA

Options include: paying salary or dividends to offset the balance; repaying cash to the company; or having the company write off the debt (which creates a taxable employment income charge). Declaring a bonus or dividend to clear the DLA before year-end is the most common approach.