Overdrawn director’s loan accounts
Establish the balance and its basis
A director’s loan account records relevant transactions between the director and the company. An overdrawn balance generally means the director owes the company money. Reconcile the ledger against bank transfers, expenses, salary and dividends.
The name given to a payment is not enough to establish its correct treatment. Your accountant may need to review supporting records and tax consequences.
Why insolvency changes the discussion
A sum owed by a director can be an asset of the company. If a liquidator is appointed, recovery may be pursued for the benefit of creditors. Do not assume the balance disappears when the company closes.
Any proposed repayment, settlement, write-off or reclassification needs appropriate advice. Creating a dividend without checking available profits is not a reliable solution.
Prepare for a constructive review
- Obtain the latest director loan ledger.
- Identify transactions without supporting records.
- Separate money owed by the director from money owed to the director.
- Explain any proposed repayment source and affordability.
- Review personal guarantees separately.
Addressing the issue early allows the company’s and director’s positions to be assessed together, rather than discovering an unexplained balance after closure has begun.
How does an overdrawn balance arise?
Withdrawals that are not supported as salary, valid dividends, expense reimbursements or repayment of money previously lent can create a loan-account balance. Personal expenditure paid from the company account may also need to be recorded. The accounting label should follow the actual transaction and evidence.
For example, if a director takes £18,000 as a loan and repays £5,000, the starting balance to reconcile is £13,000. This is an illustration, not a tax calculation. Other entries, interest and properly supported credits can affect the final figure.
What happens if the liquidator asks for repayment?
Request the ledger and calculation, then compare them with your bank statements and records. If you dispute an entry, identify it clearly and provide evidence. A general objection that the accountant prepared the accounts does not explain which transaction is wrong.
The liquidator can pursue money owed to the company. If you cannot pay in full, provide an honest account of income, assets and commitments and obtain advice on a realistic proposal. Instalments or settlement should not be assumed: any agreement needs proper consideration and written terms. Ignoring a demand can lead to legal action and additional costs.
Can dividends, salary or money owed to me clear the balance?
A dividend needs sufficient distributable profits and proper authorisation. Cash in the bank alone does not establish that a dividend is lawful. Salary has its own employment and tax requirements. Do not backdate documents or relabel withdrawals to make the balance disappear.
If you believe the company owes you money, provide the evidence and ask how any set-off rules apply. Two directors’ balances cannot simply be combined because they run the business together. Read our guidance on unlawful dividends and director payments before making corrective entries.
How are the tax position and repayment obligation different?
Tax charges associated with a director’s loan do not themselves repay the amount owed to the company. Company tax, personal benefits and the consequences of a release or write-off require separate assessment. Your accountant needs the dates and nature of withdrawals and repayments, not just the closing balance.
Before seeking advice, gather the loan ledger, bank statements, dividend paperwork, payroll records and evidence of money introduced. Explain both the company’s insolvency position and your own ability to repay. This helps separate an accounting error from a genuine debt requiring a solution.
On this page
- Establish the balance and its basis
- Why insolvency changes the discussion
- Prepare for a constructive review
- How does an overdrawn balance arise?
- What happens if the liquidator asks for repayment?
- Can dividends, salary or money owed to me clear the balance?
- How are the tax position and repayment obligation different?
- Common questions
- Speak to our team
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Common questions
Where the company is in difficulty, payments to directors require careful advice. A genuine loan does not automatically justify repayment ahead of other obligations.
Only where the accounting, tax and legal requirements are met. Do not retrospectively relabel withdrawals without professional review.
No. A loan-account debt and a guarantee are separate obligations and may both need consideration.
No. Tax arising from a loan is separate from repayment of the loan balance. Ask your accountant to reconcile both positions.
Seek advice promptly and provide accurate financial information. A liquidator may consider a supported proposal, but acceptance is not guaranteed and recovery action could put personal assets at risk.
Sources: Official guidance 1 · Official guidance 2.
Updated 1 November 2026. General guidance, with procedural detail focused on England and Wales. Requirements can differ in Scotland and Northern Ireland.