Director’s Loan Account: UK Tax Rules, Repayment and Good Practice

Director’s Loan Account: UK Tax Rules, Repayment and Good Practice

A director’s loan account records money moving between a director and their limited company outside salary, dividends and legitimate expenses. Understanding the UK tax rules, repayment deadlines and reporting duties can help directors avoid unexpected charges and protect company funds.

What is a director’s loan account?

A director’s loan account (DLA) records transactions between a director and the company that are not salary, dividends, legitimate expense reimbursements or repayment of money previously introduced by the director. When the account is in credit, the company owes the director. An overdrawn director’s loan account means the director owes money to the company.

The distinction matters because a limited company is a separate legal person. Its funds belong to the company, even where one individual is both director and shareholder.

When does a director’s loan need approval?

Loans to directors generally require members’ approval under section 197 of the Companies Act 2006, although statutory exceptions may apply. The company should check its articles and any shareholders’ agreement, obtain the required approval and record the decision before advancing funds.

Director’s loan tax: section 455 and benefit in kind

If an overdrawn director’s loan to a participator in a close company remains outstanding nine months and one day after the Corporation Tax accounting period ends, the company may face a section 455 tax charge. For loans made on or after 6 April 2026, the rate is 35.75%; earlier loans may attract a different rate. The charge can normally be reclaimed after the loan is repaid although the timing rules can leave company cash tied up.

A separate employment-tax issue can arise if the total loan exceeds £10,000 at any point and the director pays no interest, or interest below HMRC’s official rate. This may create a taxable benefit in kind, reporting obligations and Class 1A National Insurance for the company.

Simply repaying shortly before a deadline and borrowing again may not work: anti-avoidance rules can match repayments with fresh borrowing. Salary, bonus or dividend set offs must also be properly authorised, supported by sufficient distributable profits where relevant, and taxed correctly.

Director’s loan account good-practice checklist

• Keep personal and company spending strictly separate.
• Record every advance, repayment, dividend and expense promptly.
• Obtain board and shareholder approval where required.
• Document interest and repayment terms.
• Review the DLA regularly, not only at year-end.
• Take accounting and legal advice before clearing, writing off or refinancing a balance.

How should a director’s loan be treated?

A director’s loan should be treated as a genuine company asset or liability, not a casual drawing arrangement. Proper approval, accurate records, clear repayment terms and timely tax advice help protect the company, its directors and its creditors.

This article provides general information for UK companies and is not a substitute for advice on specific circumstances.