Director's loan account explained: how it works, the s455 tax charge and how to stay out of trouble

If you run a limited company, the director's loan account, often shortened to DLA, is the most misunderstood part of your books. It is not complicated in principle, but it is unforgiving in practice. Handled well, it is a tidy record of the money flowing between you and your company. Handled badly, it produces a tax charge, interest and an unpleasant conversation with your accountant. This article explains how it works, what the rules are, and how to keep it under control.

What the director's loan account is

A limited company is a separate legal person. Its money belongs to the company, not to you, even if you are the only shareholder. Whenever you take money out of the company, or put money in, that transaction needs a label. If it is salary, it goes through payroll. If it is a dividend, it is a distribution of profit. If it is a repayment of an expense you paid personally, it is an expense claim. Anything else becomes a loan between you and the company, and the running total of those loans is the director's loan account.

The account has two possible states.

Overdrawn. You have taken out more than you have put in, so you owe the company money. This is the state that causes tax problems.

In credit. You have put in more than you have taken out, so the company owes you. This is harmless and the company can repay you tax-free.

How an overdrawn balance arises

It rarely happens deliberately. It happens because:

• You paid for something personal from the business account
• You took money out in anticipation of a dividend and the profits did not materialise
• You drew regularly without declaring dividends
• You used a company card for private spending
• You took more in dividends than the company could lawfully pay, so the excess is reclassified as a loan

Each of these is easy to do and invisible until the year-end unless someone is tracking the balance.

The section 455 tax charge

If your director's loan account is overdrawn at the company's year-end, and the balance is not repaid within 9 months and 1 day after that year-end, the company must pay a tax charge under section 455 of the Corporation Tax Act 2010. For loans made on or after 6 April 2022, the charge is 33.75% of the outstanding balance. It is paid with the Corporation Tax, so the due date is the same: 9 months and 1 day after the year-end.

The charge is not a penalty. It is a temporary tax that is repayable by HMRC once the loan is cleared, but the repayment is not immediate: you claim it after the end of the accounting period in which the loan was repaid, and HMRC refunds it nine months and one day after that period. During the gap, the company is out of pocket.

For example, if the account is overdrawn by £20,000 at the year-end and still outstanding nine months later, the company pays £6,750 of s455 tax. Repay the £20,000 later and the £6,750 comes back, eventually. It is better never to pay it at all.

Other tax consequences

Beneficial loan benefit. If your total overdrawn balance exceeds £10,000 at any point in the tax year, HMRC may treat the lack of interest as a taxable benefit. The company reports it on a P11D and pays Class 1A National Insurance, and you pay income tax on the benefit, calculated using HMRC's official rate of interest. Charging interest at or above the official rate avoids the benefit but creates taxable interest income for the company.

The 30-day rule. If you repay a loan and then take out another one within 30 days, HMRC may treat the repayment as not having happened. This is often called bed and breakfasting, and it is designed to stop short-term repayments that hide a long-term loan.

How to clear an overdrawn account

You can clear the balance in several ways. The right one depends on your circumstances and ideally your accountant's advice.

Repay it in cash. Pay the money back into the company account. Simple, but you need the cash.

Declare a dividend. If the company has sufficient distributable profits, a dividend can be offset against the loan. You will pay dividend tax on it. See our director salary and dividend calculator.

Pay a bonus or salary. The company can pay additional salary through payroll and offset it. This attracts income tax and National Insurance, including employer National Insurance for the company.

Offset against money owed to you. If you are owed an expense claim or have previously lent money, set them against each other.

Whichever route you choose, document it properly, with a board minute and dividend voucher where relevant, and make sure the books show it.

How to bookkeep the account

The mechanics are straightforward in any accounting software.

1. Create a director's loan account in the chart of accounts, as a liability if it is in credit and an asset if it is overdrawn. Most software uses one account that can swing either way.
2. Code every personal transaction to it: money paid out to you that is not salary or dividends, and personal costs paid by the company.
3. Code money you pay in to it as well.
4. Check the balance every month. It should be a deliberate number, not a surprise.
5. Reconcile it at the year-end and decide how to clear any overdrawn balance before the s455 deadline.

Our director's loan account bookkeeping service does this each month and flags the balance as it moves, and our guide to limited company bookkeeping shows where the account fits in the wider picture.

Using the account sensibly

Credit balances are useful. Many directors fund the early stages of a company with their own money and treat it as a loan. The company can repay that loan at any time, tax-free, as long as the account is in credit. It is also a convenient way to reimburse yourself for expenses you paid personally, provided you keep the receipts. See how to keep receipts for HMRC.

An overdrawn balance can also be legitimate, for example a short-term loan you plan to repay quickly. The risk comes from leaving it unmanaged. If you intend to borrow from the company, agree the terms, keep the balance under £10,000 where practical and clear it before the year-end.

Warning signs

• A balance that grows every month without a plan
• Personal spending on the company card
• Regular transfers to your personal account labelled as "drawings"
• No dividends declared but regular withdrawals
• A large overdrawn balance approaching the year-end

If you recognise any of these, review the account now, not in nine months.

What to tell your accountant

Your accountant needs a schedule of every entry in the account for the year, the balance at the year-end and the balance a few days before the year-end, because HMRC looks at that for the 30-day rule. They will also want to know what you plan to do about any overdrawn balance. Our year-end bookkeeping service produces that schedule as part of the hand-over pack.

Frequently asked questions

What is the s455 tax rate?

33.75% of the outstanding overdrawn balance, for loans made on or after 6 April 2022.

When is s455 tax due?

9 months and 1 day after the end of the accounting period in which the loan was made, the same date as Corporation Tax.

Can I take money from my company without paying tax?

You can repay loans you made to it, claim expenses you paid personally and receive properly declared salary and dividends. Other withdrawals create a loan that may become taxable.

Does a credit balance have tax consequences?

No. If the company owes you money, it can repay you tax-free. Charging the company interest on your loan would create taxable income for you.

Can you keep track of my director's loan account?

Yes. We reconcile it every month and warn you before it becomes a problem. Get an instant quote.