What is a Director’s Loan Account?

A Director’s Loan Account, often shortened to DLA, records money moving between a limited company and its director that is not:

• Salary processed through payroll

• Dividends that have been properly declared

A limited company is legally separate from its directors, so company money and personal money must be kept separate. The Director’s Loan Account keeps track of those movements.

The balance shows whether:

• The company owes the director money

• The director owes the company money

HMRC overview:
https://www.gov.uk/directors-loans

When we allocate items to the Director’s Loan Account

When a director pays a business expense personally

If you pay for a genuine business expense using personal funds, the company owes you that money back.

This often happens when:

• You pay a supplier from your personal bank account

• You pay for parking or travel personally

• You use a personal card for a business cost

When we see an expense recorded in your envelope or bookkeeping records that has clearly been paid personally and has not come out of the company bank account, we will normally allocate it to your Director’s Loan Account.

This reflects that:

• The company has incurred the expense

• The director has funded it personally

• The company now owes the director the amount

When money is taken out of the company

If money leaves the company and it is not processed as salary, dividends, or a reimbursement of expenses, it is usually treated as money the director owes back to the company.

This creates an overdrawn Director’s Loan Account.

Examples include:

• Personal spending on a company card

• Transfers from the company account to a personal account without being treated as salary or dividends

What are the implications of an overdrawn Director’s Loan Account?

An overdrawn Director’s Loan Account means the director owes money to the company. This can create additional tax implications.

Section 455 charge

If the Director’s Loan Account is overdrawn at the company year end and the balance is not repaid within 9 months and 1 day of the year end, the company may have to pay a temporary Corporation Tax charge known as a section 455 charge.

The charge is currently 33.75 percent of the outstanding balance.

This amount can be reclaimed by the company once the loan is repaid, but it creates a cash flow impact in the meantime.

Benefit in kind rules

If the director owes the company more than £10,000 at any point in the tax year and no interest is charged at HMRC’s official rate, it may be treated as a benefit in kind.

This can result in:

• A personal Income Tax charge for the director

• Class 1A National Insurance for the company

• A requirement to report the benefit

How we deal with an overdrawn balance

If we see that the Director’s Loan Account is overdrawn and the company has sufficient distributable profits, we may make the professional judgement to declare a dividend to reduce or clear the overdrawn balance.

This is only done where:

• There are enough retained profits available

• It is appropriate based on the company’s position

Declaring a dividend in this way can:

• Reduce the overdrawn balance

• Help avoid or reduce section 455 exposure

• Regularise funds already taken

Dividends must always be supported by sufficient profits and properly documented.

When the account is in credit

If the Director’s Loan Account is in credit, the company owes the director money. The director can usually withdraw this balance without further tax, as it is simply repayment of money already introduced or paid personally on behalf of the company.

Key takeaway

If you pay for business expenses personally, we allocate them to your Director’s Loan Account so the company recognises that it owes you the money.

If you take money out of the company that is not salary, dividends, or reimbursed expenses, it may create an overdrawn balance. This can have tax consequences, but where appropriate and where profits allow, a dividend may be declared to reduce that balance.