Directors’ Loan Accounts (DLAs) A Simple Guide

If you’re a company director, chances are you’ve heard of a Director’s Loan Account (DLA)—but what exactly is it, how should you use it, and what happens if it goes wrong?

This guide breaks it all down in plain English.


What is a Director’s Loan Account?

A Director’s Loan Account is simply a record of money:

  • You put into the company (e.g. personal funds used to cover expenses), or
  • You take out of the company (that isn’t salary, dividends, or reimbursed expenses)

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

  • If the company owes you → the DLA is in credit
  • If you owe the company → the DLA is overdrawn



How to Use a Director’s Loan Account Properly

1. Covering Business Costs Personally

You can pay for business expenses out of your own pocket and reclaim them later.

Example:

  • You buy equipment for £500 personally
  • Company records £500 owed to you in the DLA

2. Taking Money Out (Carefully!)

You can withdraw money from the company via the DLA—but only if:

  • You have sufficient profits for dividends, or
  • You intend to repay the amount

Otherwise, you risk creating an overdrawn loan account.


3. Short-Term Cash Flow Flexibility

DLAs can help smooth timing differences:

  • Taking funds now
  • Declaring dividends later to clear the balance

But timing is critical (more on that below).


What Happens If Your DLA Is Overdrawn?

This is where problems start.

1. Corporation Tax Charge (Section 455)

If your DLA is still overdrawn 9 months after the year-end, the company may face a tax charge of:

  • 33.75% of the outstanding balance

This is temporary (recoverable when repaid), but it can seriously impact cash flow.


2. Personal Tax – Benefit in Kind

If:

  • The loan exceeds £10,000, and
  • You don’t pay interest

You may be taxed personally on a benefit in kind.


3. HMRC Scrutiny

Repeated or large overdrawn balances can attract attention and raise questions about:

  • Disguised remuneration
  • Improper dividend use

Tax Efficiency Tip: Charging Interest

Here’s a strategy many directors overlook:

The company can charge you interest on the overdrawn loan.

Why this helps:

  • Avoids or reduces benefit-in-kind tax
  • The company receives taxable interest income
  • Creates a more commercial arrangement

However:

  • Interest must be charged at a reasonable (market) rate
  • Proper documentation is essential

Done correctly, this can improve overall tax efficiency.


Best Practices for Managing Your DLA

  • ✔ Keep accurate, up-to-date records
  • ✔ Avoid letting the account drift into large overdrafts
  • ✔ Clear balances regularly (via dividends or repayment)
  • ✔ Plan withdrawals in line with profits
  • ✔ Review your position before your year-end

Common Mistakes to Avoid

  • ❌ Taking money assuming profits will “cover it later”
  • ❌ Forgetting the 9-month repayment deadline
  • ❌ Ignoring benefit-in-kind rules
  • ❌ Treating the company bank account like a personal one

Final Thoughts

A Director’s Loan Account is a useful and flexible tool—but only when used correctly.

Handled poorly, it can lead to:

  • Unexpected tax bills
  • Cash flow issues
  • HMRC complications

Handled properly, it can support efficient cash management and even offer tax planning opportunities.


Need Help?

If you’re unsure about your Director’s Loan Account, worried about an overdrawn balance, or want to explore tax-efficient strategies like charging interest:

Get in touch today—we’re happy to review your situation and help you stay compliant while making the most of your position.