Director's Loan Account Explained
A practical, plain-English guide for UK company directors — including the current s455 tax rate and what happens if the company fails.
What is a director's loan account?
A director's loan account (DLA) is a running record of money moving between you and your company that is not salary, a dividend, an expense repayment, or repayment of money you previously put into the company. Anything outside those categories lands in the DLA.
If the balance is in credit, the company owes you money — for example, personal funds you put in to cover early costs. You can usually draw this back without tax consequences, because you're simply recovering your own money.
If the balance is overdrawn, you owe the company money. This typically happens when you've taken out more than your salary, dividends and expense reimbursements justify.
The DLA appears on the company's balance sheet: an in-credit balance is a liability of the company, while an overdrawn balance is an asset — money the company is owed by you. That last point matters more than most directors realise, as we explain in the final section.
How does an overdrawn director's loan account happen?
Usually, there's no single dramatic moment. An owner-director draws money from the company through the year without a structured plan for how those drawings will be covered, or the company pays personal costs directly. At year end, the total drawn exceeds what has been properly declared as salary, dividends and expense reimbursements — and the difference sits as an overdrawn DLA.
It's tempting to assume the drawings can simply be labelled as dividends afterwards. They can't, unless the legal requirements were actually met: dividends require sufficient distributable profits and proper declaration and documentation at the time. A "dividend" that doesn't meet those tests isn't a dividend, however it's described in the books.
How can an overdrawn DLA be fixed?
There are several legitimate routes, and in practice a combination is often used. The right mix depends on your company's profits, your personal tax position and how quickly the balance needs to come down.
Salary or bonus
Where appropriate, process additional pay properly through payroll, with PAYE and National Insurance accounted for. The net amount is credited against the DLA rather than paid out in cash.
A lawful dividend
Where the company has sufficient distributable reserves, a dividend can be properly declared and documented, then credited to the DLA. This is a paper exercise — no cash needs to move — but it cannot be backdated or invented after the fact.
Reimburse genuine business expenses
If you've personally paid legitimate company expenses, record them with receipts and evidence, and reimburse or credit them to the DLA. Many overdrawn balances shrink significantly once genuine expenses are properly captured.
Amounts paid personally on behalf of the business
Company costs you've settled from your own pocket, or money you've introduced into the company, can reduce an overdrawn DLA — provided they are genuine company costs and properly recorded.
Physical repayment
The most direct option: transfer money back to the company to reduce or clear the balance. If this happens within nine months and one day of the year end, the s455 charge (below) won't apply.
Plan withdrawals during the year
The best fix is prevention. Agreeing a structured mix of salary, dividends and expenses during the year — rather than unpicking drawings at year end — keeps the DLA under control and avoids surprises.
The tax consequences: s455
An overdrawn DLA isn't just a bookkeeping entry — it can create a real tax charge for the company under Section 455 of the Corporation Tax Act 2010 ("s455").
The s455 charge
Where a close company loan to a director (a "participator") is still outstanding nine months and one day after the end of the Corporation Tax accounting period, the company can face an s455 charge on the outstanding balance, subject to the detailed rules and exceptions. For loans made on or after 6 April 2026, the s455 rate is 35.75% — it follows the dividend upper rate. The charge is paid by the company, not the director personally.
Getting s455 back
s455 can generally be reclaimed after the loan is genuinely repaid, released or written off, subject to HMRC's timing and rules — so it's often described as a temporary tax. Note that any interest charged on late-paid s455 is not reclaimable.
"Bed and breakfasting" rules
Repaying the loan just before the deadline and borrowing it again shortly afterwards may not avoid the charge. Anti-avoidance rules can treat the repayment as ineffective where further borrowing follows within 30 days (or under wider arrangements), so a repayment needs to be genuine and lasting to count.
Loans over £10,000: benefit in kind
If the loan balance exceeds £10,000 at any point in the tax year and interest isn't charged at HMRC's official rate, a benefit-in-kind charge can also arise — personal tax for the director and Class 1A National Insurance for the company. Worth reviewing alongside s455.
The bigger risk: liquidation
Because an overdrawn DLA is money you owe to the company, it is an asset of the company. That has serious consequences if the company ever enters liquidation or insolvency.
The debt does not simply disappear. The liquidator's job is to recover the company's assets for the benefit of its creditors — and an overdrawn director's loan is one of the first places they look. The liquidator can pursue you personally for repayment of the balance.
If a large balance has built up and you can't repay it, this can create serious personal financial exposure at exactly the moment the business is failing.
To be clear: an overdrawn DLA does not make you automatically liable for all of the company's debts. The risk is repaying the amount you personally owe the company — plus any separate claims or issues that may arise on the facts of your case. But that alone can be a substantial sum, which is why keeping the DLA under control matters even when times are good.
This article is general information only and isn't tax, legal or insolvency advice. The right treatment depends on your circumstances, so please take advice before acting.
Concerned about an overdrawn director's loan account?
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Common Questions
What is a director's loan account?
A director's loan account (DLA) records money moving between you and your company that isn't salary, a dividend, an expense repayment, or repayment of money you previously put in. In credit means the company owes you; overdrawn means you owe the company.
What is the s455 tax rate?
For loans made on or after 6 April 2026, the s455 rate is 35.75% — it follows the dividend upper rate. The charge applies where a close company loan to a participator is still outstanding nine months and one day after the end of the Corporation Tax accounting period, subject to the detailed rules.
Can I clear my director's loan with a dividend?
Yes, where the company has sufficient distributable profits and the dividend is properly declared and documented. The dividend is credited to the DLA as a paper exercise — but it cannot be backdated, and drawings can't simply be relabelled as dividends after the fact.
Can I repay the loan and borrow it again to avoid s455?
No — anti-avoidance 'bed and breakfasting' rules can treat a repayment as ineffective if you borrow again within 30 days or under wider arrangements. The repayment needs to be genuine and lasting.
What happens to my director's loan if the company goes into liquidation?
An overdrawn DLA is an asset of the company, so it doesn't disappear in liquidation. The liquidator can pursue you personally to repay the balance for the benefit of creditors, which can create serious personal financial exposure.