Director's Loan Accounts Explained: Avoid Costly HMRC Mistakes

If you're a company director, you've probably transferred money between yourself and your business at some point.

Maybe you've paid for company expenses using your own bank account, borrowed money from the business to cover personal costs, or lent the company money to help with cash flow.

If so, you've likely used a Director's Loan Account (DLA), even if you didn't realise it.

Director's Loan Accounts are a normal part of running a limited company, but they can become complicated if they're not managed properly. Understanding how they work can help you avoid unnecessary tax charges and ensure you stay compliant with HMRC.

In this guide, we'll explain the basics in plain English.

What Is a Director's Loan Account?

A Director's Loan Account is simply a record of money moving between you and your company that isn't:

Salary paid through PAYE
Dividends
Reimbursement of genuine business expenses

Think of it as an IOU between you and your company.

Sometimes the company owes you money. This usually happens when you've personally paid for business expenses or lent money to the company. In these situations, the company can generally repay you without creating a personal tax liability.

At other times, you may owe money back to the company. For example, if you transfer money from the company bank account into your personal account or use company funds for private purchases, this will normally create an overdrawn Director's Loan Account.

Keeping accurate records of these transactions throughout the year makes preparing your accounts much easier and helps avoid problems later.

Borrowing Money from Your Company

Many directors borrow money from their company from time to time, and there's nothing wrong with doing so. However, it's important to remember that the money doesn't automatically belong to you simply because you're the director.

Unless it's treated as salary, dividends or a reimbursement of business expenses, HMRC generally considers it to be a loan.

If the loan isn't repaid within the required timescale, your company could face an additional tax charge.

What Is Section 455 Tax?

Section 455 tax applies when a director or shareholder owes money to a close company and the loan remains outstanding 9 months and 1 day after the company's accounting year end.

From 6 April 2026, the Section 455 tax rate increased to 35.75% of the outstanding loan balance.

The important point to remember is that this tax is paid by the company, not by the director personally.

Example

Imagine you borrow £20,000 from your company and don't repay it before the deadline.

Your company could become liable to pay a Section 455 tax charge of £7,150.

Although this tax can usually be reclaimed once the loan has been repaid (subject to HMRC's rules), it can create an unnecessary cash flow burden for the business.

The easiest way to avoid this is by reviewing your Director's Loan Account well before your year end and discussing any outstanding balances with your accountant.

Benefit in Kind Rules

Even if you repay your Director's Loan before the Section 455 deadline, another set of HMRC rules may still apply.

If your outstanding loan exceeds £10,000 during the tax year and you pay little or no interest, HMRC may treat the loan as a Benefit in Kind.

This could mean:

You pay Income Tax on the benefit.
The company reports the benefit to HMRC.
The company pays Class 1A National Insurance Contributions on the taxable value of the benefit.

If you're planning to borrow a significant amount from your company, it's always worth taking professional advice first.

Lending Money to Your Company

Many directors choose to lend money to their company, particularly when starting a new business or helping with cash flow.

Unlike borrowing from the company, lending money is generally much simpler. The company can usually repay you without creating a tax liability because it's simply returning money you've previously introduced into the business.

If you decide to charge the company interest, additional tax rules may apply, so it's always best to speak to your accountant beforehand.

Should You Use Your Company Bank Account for Personal Spending?

Technically, yes but it's rarely a good idea.

Using your company account for personal purchases can quickly lead to an overdrawn Director's Loan Account and make your bookkeeping much more complicated.

Keeping your business and personal finances separate makes it easier to understand your company's financial position and significantly reduces the risk of bookkeeping errors and unexpected tax charges.

The Most Common Mistakes We See

After working with company directors across many different industries, we've noticed the same issues arise time and time again.

Fortunately, they're all avoidable with good bookkeeping and a little planning.

Some of the most common mistakes include:

Using the company bank account for personal spending.
Forgetting to repay Director's Loans before the deadline.
Assuming every withdrawal is tax-free.
Declaring dividends without sufficient distributable profits.
Not reviewing the Director's Loan Account regularly.
Trying to clear a loan shortly before the deadline and borrowing the money back again, which may be caught by HMRC's anti-avoidance rules.

A quick review of your Director's Loan Account throughout the year can often prevent these problems before they arise.

Final Thoughts

A Director's Loan Account doesn't have to be complicated—it simply records money moving between you and your company.

The key is understanding when a withdrawal becomes a loan, how the tax rules work, and when action needs to be taken. Reviewing your Director's Loan Account regularly and keeping accurate records can save your business both time and money.

Every company is different, so the most tax-efficient way of taking money from your business will depend on your circumstances. Seeking advice early can often help you avoid costly mistakes and ensure you're making the most of the reliefs available.

How Even Solutions Can Help

At Even Solutions, we help company directors understand their finances and stay compliant with HMRC requirements. Whether you need support with bookkeeping, year-end accounts, Corporation Tax, payroll or tax planning, our experienced team is here to help.

We'll review your Director's Loan Account, identify any potential issues before they become costly, and help you take money from your business in the most tax-efficient way possible.

If you'd like friendly, practical advice tailored to your business, get in touch with Even Solutions today. We'd be delighted to help you keep your business compliant, organised and financially healthy.