What is a director’s loan account, and what are the tax implications?

What is a Directors Loan Account?A directors loan account is a financial arrangement between a company and its director. The company loans money to the director, which the director then uses for personal or business purposes.

The director repay the loan plus interest at a later date. Directors loan accounts can be a convenient way for directors to access funds, but they can also be a source of financial abuse.

For example, if a company loans money to a director and the director does not repay the loan, the company may be unable to recoup the debt. As a result, directors loan accounts should only be used with caution and careful consideration.

A record of transactions between a company and its directors, apart from the salary and dividends, is known as a Director’s loan account (DLA). If you’re the director of a company, you may well have a loan account of your own.

There are certain instances where a director may lend a company money in order of funding day-to-day trading, as well as the purchase of assets as an alternative to investing the money in share capital. In a situation such as this, the director is also a creditor of the business.

What is a director’s loan account?

A director’s loan account (DLA) is a record of transactions where at any point in time an amount of money, which isn’t a salary, dividend or expense repayment, is either:

  • owed by the company to a director
  • owed by a director to the company (called an ‘overdrawn loan account’)

Various provisions of a DLA are set out in the Companies Act 2006 and the accounting and taxation treatment of a DLA is determined by HM Revenue and Customs (HMRC).

What should a director’s loan account contain?

Your DLA, or director’s loan account, is an important record that should include the following items:

  • Any cash withdrawals that you, as a director, have made from the company
  • Personal expenses that were paid for using company money or credit cards

It’s worth noting that business expenses must be incurred solely for the purpose of the business. If you’ve used company resources to purchase something that doesn’t meet this requirement, it would be considered a personal expense. To learn more about what can and cannot be claimed as a business expense, download our guide.

Managing your DLA is a critical aspect of running a limited company, and it’s an area that comes with its fair share of risks. HMRC will review your DLA annually through your company’s tax returns to ensure that you’re adhering to their rules and guidelines.

Who can take out a director’s loan?

As the name implies, a director’s loan is principally a transaction or series of transactions between a director and the company.

However, if the company is a ‘close company’ (a company which is controlled by five or fewer participators (any person who has a share or interest in the capital or income of the company) or a company which is controlled by any number of participators if they are also directors of the company) and ‘private’ payments are made by the company to the director’s family, friends, business partners or any other person associated with the director, then these transactions should also be recorded in the DLA.

When might you want to take out a loan?

There many reasons why a director may wish to take out a loan from the company, however such loans tend to fall into one of two main categories:

  1. You may wish to borrow money from the company in order to help you with a temporary cash flow problem with your own personal finances outside of the company’s affairs.
  2. It’s often custom practice in owner managed businesses for the director to be paid partly through the payroll, usually up to the National Insurance threshold, and partly by way of dividends, declared and paid out of the company’s distributable reserves. In order to assist with your own monthly cashflow requirements you may draw a certain amount from the company each month. This amount will accumulate month on month until such time as a dividend is declared when the amount which you have in effect borrowed from the company is set off against the declared dividend. 

How much can you borrow on a director’s loan?

There are no specific limits as to how much a director can borrow from a company, however there are certain implications a director should be aware of if they have an overdrawn loan account.

The introduction of the Companies Act 2006 removed the general prohibition of companies making loans to directors. As a rule, loans for more than £10,000 require shareholder approval beforehand. In many small companies, however, as the director and the shareholder are one and the same person the approval is more of a formality than a specific legal issue.

However, if the loan is more than £10,000, your company must treat the loan as a benefit in kind and you may have to pay tax on the loan at the official rate of interest.

Read more: Can’t afford to pay self assessment tax bill

When will I have to pay tax on a director’s loan?

As a director, it’s important to keep an eye on your DLA, as having an overdrawn account at the end of the company’s year-end can result in additional tax payments. However, if you pay back the full loan amount within nine months and one day after the year-end, you can avoid paying any tax. So, if your company’s year-end is on April 30th, 2022, you have until February 1st, 2023, to repay the loan.

If you fail to pay back the loan within the set timeframe, your company will have to pay additional Corporation Tax at a rate of 33.75%, which is repayable to the company by HMRC once the loan is repaid. But keep in mind that there may also be personal tax to pay at the same rate if you don’t repay the loan.

To illustrate, let’s say ABC Limited has a Corporation Tax bill of £950 and an overdrawn DLA of £15,000 that remains unpaid for nine months and one day after the year-end. As a result, the company must pay an additional Corporation Tax of £5,062.50, which brings the total Corporation Tax to £6,012.50. However, the company can reclaim the £5,062.50 in the future if the loan is repaid or written off.

If the loan is written off by the company, the director will need to pay personal tax on the loan as dividends at a higher rate of 33.75%. Moreover, an overdrawn DLA also means declaring a benefit in kind on Form P11D, and the company must pay employers national insurance contributions.

The director’s personal tax liability depends on whether the loan is written off by the company or not. If the loan is not written off, the director must include it as a benefit in kind on their Self Assessment tax return. But if the loan is written off and the company reclaims the Corporation Tax paid, the director will need to include the loan amount as dividends on their Self Assessment, along with any benefit in kind. HMRC will then calculate the overall personal tax liability.

Do I need to record director’s loans?

Yes, it’s crucial to recognise the legal separation between you and your company. By forming a limited company, you have created a distinct legal entity that is accountable for its own statutory responsibilities. Therefore, any withdrawals made must be properly documented in your company’s accounts.

What happens if I owe my company money?

In the event that you owe your company more than £10,000 interest-free, the entire loan amount is deemed a benefit in kind and must be documented on Form P11D at the end of the tax year. This will be subject to both personal and company tax. For the 2022/23 tax year, your company will be required to pay Class 1A National Insurance at a rate of 14.53% on the full loan amount, whereas in the 2021/22 tax year, the rate was 13.8%.

For loans exceeding £10,000, it is generally required to obtain shareholder approval beforehand. However, for most smaller companies, where the director is also a controlling shareholder, this approval is often more of a formality than a legal requirement.

If the company owes you money

When you lend money to your company, it’s important to note that your company won’t be liable for any Corporation Tax on the amount you lend. Plus, you have the flexibility to withdraw the entire sum from the company at any time.

If you decide to charge interest on the loan, this interest will be categorised as a business expense for your company, and as personal income for you. It is necessary to report the interest income on your Self Assessment and pay tax on it accordingly.

Interest rates on Director’s Loans

It’s essential to be aware of the rules surrounding the repayment of loans and interest charges if you lend money to your company or take a Director’s Loan from it.

The Gov.uk website provides comprehensive information on the rates and regulations that you need to understand, but to avoid any issues with HMRC, we strongly advise consulting an accountant.

‘Bed and Breakfasting’

Directors have been known to use a tax-avoidance method called bed and breakfasting to manage their Director’s Loan Accounts (DLAs). This involves repaying the borrowed money to the company just before the end of the tax year, only to withdraw it immediately without any real intention of paying it back. To prevent this, if a director repays a loan over £10,000, they cannot take out a loan over this amount within 30 days. Otherwise, HMRC may consider that the director has no intention of paying the money back, and the entire amount will be subject to tax.

Even if the 30-day rule is followed, bed and breakfasting may still be subject to tax if the loan is over £15,000. If a loan of over £15,000 is made to a director, and before any repayment is made, there is an intention to take out a loan of over £5,000 that is not matched to another repayment, then bed and breakfast rules apply.

HMRC can interpret patterns of repeated withdrawals or similar sums being withdrawn as evidence of intention, so it is essential to be careful. Due to the complexity of these rules, it is best to speak to an expert accountant to determine the most efficient way to repay a director’s loan.

Written off loans

It is important to consider the tax and accounting implications when a director’s loan is written off by your company. Seeking advice from an accountant can help you determine the best course of action for your business.

Do HMRC monitor director’s loans?

Yes, it’s important to keep a close eye on any Director’s Loan Accounts (DLAs) that tend to remain in the red throughout the year, as HM Revenue and Customs will be scrutinising them come tax season. It’s worth noting that they may even classify these funds as income rather than a loan, and consequently impose both Income Tax and National Insurance on the amount. To avoid this, we recommend diligently monitoring your director’s withdrawals to make sure you don’t go over the £10,000 threshold.

Directors must understand that if they borrow too much and the company cannot fulfill its financial obligations, the company may be compelled to go into liquidation. In this case, the liquidator could initiate legal proceedings against the director to recover the debt. It’s crucial to stay vigilant and manage DLAs prudently to safeguard the company’s financial stability.

Frequently asked questions

How does a directors loan account work?

A directors loan account works when you (or other close family members) get money from your company that is not: a salary, dividend or expense repayment. money you've previously paid into or loaned the company.

Do you pay tax on directors loan account?

Yes, you pay tax on directors loan account at 32.5% of the outstanding amount, or 25% if the loan was made before 6 April 2016.


In conclusion, directors’ loan accounts can be a useful tool for companies to access financing, but they must be carefully managed and monitored to ensure that they do not create financial problems for the company. Directors should only borrow what they can afford to repay and should make sure that all loans are properly documented and comply with any relevant laws and regulations.

If a company is in liquidation, an overdrawn directors’ loan account can create additional complications and difficulties for the liquidator, who may need to prioritize the repayment of the directors’ loans over other debts owed by the company. It is important for directors to be aware of the potential risks and responsibilities associated with directors’ loan accounts and to exercise caution when borrowing from their company.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.