As a company director, you may use your business’s funds for personal expenses or inject personal funds into your company. These transactions flow through your Director’s Loan Account (DLA). Understanding how DLAs work – and the tax rules that apply – helps you stay compliant and avoid unexpected tax charges.
What Is a Director’s Loan Account?
A Director’s Loan Account records money you owe your company (if you’ve withdrawn more than you’ve put in) or the company owes you (if you’ve made personal loans into the company). It’s distinct from salary, dividends or expenses claims and must be tracked meticulously in your company’s bookkeeping.
Common DLA Transactions
- Withdrawals for personal use (e.g. paying household bills).
- Reimbursement of business expenses you covered personally.
- Loans you advance to the company for working capital.
- Repayment of overdrawn balances from personal funds.
Tax Implications of Overdrawn DLAs
If your DLA is overdrawn (you owe the company money) at the company year end, two key tax rules apply:
Benefit-in-Kind Tax
If you owe more than £10,000 at any point in the tax year, and the loan is interest free or below the official rate, HMRC treats it as a benefit in kind.
You’ll pay income tax on the “notional” interest difference, and the company must report this via P11D.
Section 455 Corporation Tax
If the loan remains unpaid nine months and one day after the company’s year end, the company must pay Corporation Tax at 33.75% on the outstanding amount.
Once you repay the loan, your company can reclaim this tax, though the timing may affect your cashflow.
Anti-Avoidance Measures: 30-day and Arrangement Rules
30-day Rule
Under HMRC’s anti-avoidance provisions, if you repay £5,000 or more of your DLA and then within 30 days take out a new loan of £5,000 or more, the initial repayment is treated as ineffective. The company will incur the Section 455 charge on the lower of the repayment and the new borrowing, as if no repayment had been made.
Arrangement Rule
Where your outstanding DLA balance exceeds £15,000, and at the time of a repayment there are arrangements or an intention in place to borrow £5,000 or more subsequently, HMRC will also disregard the repayment. This means the full repayment amount (or more) can attract the Section 455 charge unless the balance is cleared in full within the nine-month window.
Managing Your Director’s Loan Account
Keep Accurate Records
Maintain a separate ledger for your DLA and update it with each transaction. Ensure your bookkeeping software (e.g. Xero) correctly tags every loan movement.
Set a Repayment Plan
Aim to settle overdrawn balances within nine months of your year end to avoid Section 455 charges. Consider small, regular repayments if a single lump sum isn’t feasible.
Avoid ‘Bed and Breakfasting’
To prevent triggering the 30-day rule or arrangement rule, leave at least 31 days between any significant repayment (over £5,000) and new borrowing. Alternatively, clear the full balance before re-borrowing or use a taxable distribution (e.g. dividend or bonus) to fund the repayment without anti-avoidance consequences.
Charge Appropriate Interest
If you need to owe the company more than £10,000, charge at least the prevailing HMRC official rate of interest. This prevents a taxable benefit and keeps your DLA compliant.
Monitor Thresholds
Use calendar reminders to review your DLA balance before the £10,000 benefit-in-kind threshold, the nine-month repayment deadline, and any 30-day windows for significant repayments.
Best Practices for Directors
• Policy & Planning: Agree a DLA policy with your fellow directors and set clear borrowing limits.
• Regular Reviews: Include the DLA balance in your management accounts to spot issues early.
• Professional Advice: Complex DLAs – especially where multiple directors lend to or borrow from the company – benefit from tailored tax planning.
Need Help with Your Director’s Loan Account?
Mismanaging a DLA can trigger unexpected personal and corporate tax bills. Our team at Plus Accounting specialises in Director’s Loan Accounts, ensuring you:
- Comply with HMRC rules
- Optimise your tax position
- Plan effective repayment strategies
Contact us today to review your DLA, avoid penalties, and keep your finances on track.
Author: Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner, and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date Published: 08 May 2025