Director's Loan Accounts: What They Are and How to Fix an Overdrawn Balance
Why a director's loan account becomes overdrawn, the tax risks, and practical ways to clear or reduce the balance.
A director's loan account (DLA) records money moving between a director and their company that is not salary, a dividend, an expense repayment, or repayment of money the director previously lent or paid in.
The account can be in credit (the company owes you) or overdrawn (you owe the company). This guide focuses on overdrawn balances and how to fix them. For a broader overview, see our director's loan account explainer.
1. What is a director's loan account?
In plain terms, it is a running record of what you owe the company and what the company owes you. Money that normally goes through it includes:
- cash withdrawn that is not salary or a dividend
- personal bills paid from the company bank account
- money you lend or pay into the company
- business costs you paid personally that the company has not yet repaid
The balance at the year end is shown on the company's balance sheet in its annual accounts.
2. How does a director's loan account become overdrawn?
A common example: an owner-director transfers money to themselves throughout the year as and when needed, without a structured salary and dividend plan. Some personal spending also goes through the company card. Dividends may be taken without checking there are enough distributable profits, or without properly declaring them.
By the time the accountant prepares the year-end accounts, the withdrawals cannot all be treated as salary, dividends or expense repayments. Whatever is left is debited to the DLA, and the director now owes the company money.
3. Why can an overdrawn balance be a problem?
- Section 455 company tax charge. If a shareholder-director still owes the company money 9 months and 1 day after the end of the Corporation Tax accounting period, the company may have to pay a temporary Corporation Tax charge under the loans-to-participators rules. The rate is 35.75% for loans made on or after 6 April 2026, and was 33.75% for loans made from 6 April 2022 to 5 April 2026. This is a charge on the company, not automatically the director's personal tax, and it can be reclaimed once the loan is repaid, released or written off, subject to the rules.
- Loans over £10,000. If the balance exceeds £10,000 at any point and you pay less than HMRC's official rate of interest (3.75% from 6 April 2026), beneficial-loan rules can apply. This can mean P11D reporting, personal tax for you and Class 1A National Insurance for the company.
- Unsupported dividends. Dividends paid without sufficient distributable reserves may be unlawful and may have to be treated differently, which can create further tax and legal problems.
4. How can you fix an overdrawn director's loan account?
There is no single best method. The right approach depends on the company's profits, its payroll and tax position, timing and your personal circumstances. Often a combination works best.
ASalary or bonus
The company can pay additional salary or a bonus through PAYE where this is commercially and tax appropriate. It must go through payroll correctly and will have Income Tax and National Insurance consequences for both you and the company.
Rather than transferring cash, the net amount due to you can be credited against the loan account, as long as it is properly documented and accounted for.
BProperly declared dividends
If you are also a shareholder and the company has sufficient distributable profits, a properly declared dividend can be credited against the loan account.
Dividends must be supported by available profits and correct paperwork, such as board minutes and dividend vouchers. They are not simply a retrospective label for drawings. See our guide to taking dividends from a limited company.
CReimburse genuine business expenses
If you personally paid legitimate business expenses, the company may owe that money back to you. Recording those expenses correctly can reduce an overdrawn balance.
Examples include business mileage, business travel, software, equipment or supplies paid for personally, subject to the normal tax rules. Personal or private spending cannot be turned into a business expense just to clear the account.
DCompany liabilities you paid personally
Where you used personal funds to settle genuine company bills or buy genuine business items, those amounts can be credited to the loan account once supported by receipts or invoices. This can offset money previously withdrawn.
EPhysically repay the money
You can transfer money from your personal bank account back to the company. This directly reduces or clears the overdrawn balance.
Be aware of the anti-avoidance "bed and breakfasting" rules: repaying the loan and then quickly taking the money back out can prevent the expected tax relief in some cases. If the balance is significant, take advice first.
5. Put a withdrawal plan in place
The best prevention is a simple plan for how you take money out of the company:
- A regular salary paid through payroll.
- Dividends only when supported by current distributable profits and properly documented.
- Personally paid business expenses recorded and reimbursed promptly.
- The DLA balance checked monthly or quarterly, not discovered at the year end.
If you regularly withdraw money, quarterly management accounts and up-to-date bookkeeping make it much easier to see what can safely be taken.
6. Get help with your director's loan account
In Front Accounting can review your DLA, work out how much can properly be cleared using salary, dividends or expenses, calculate any tax exposure and put a practical plan in place. We support limited companies with accounts, payroll and tax returns.
This article is general information, not personal tax advice. The right approach depends on your individual and company circumstances, so take advice before acting.
Common Questions
What is an overdrawn director's loan account?
It means the director owes money to the company. This usually happens when money has been taken out that is not salary, a dividend, an expense repayment or repayment of money the director previously paid in.
Can I clear a director's loan account with a dividend?
Possibly, if you are a shareholder and the company has enough distributable profits. The dividend must be properly declared and documented, and it can then be credited against the loan account. A dividend cannot simply be used as a retrospective label for drawings where profits are not available.
Can I clear a director's loan account with salary?
Yes, the company can pay additional salary or a bonus through payroll. Income Tax and National Insurance apply, and the net amount due to you can be credited against the loan account if it is properly processed and recorded.
Can expenses I paid personally reduce my director's loan account?
Yes, if they were genuine business expenses or company liabilities and you have receipts or invoices. The company owes you those amounts, which can be credited to the loan account. Personal spending cannot be reclassified as a business expense just to clear the balance.
What happens if I do not repay a director's loan within 9 months?
If a shareholder-director still owes the company money 9 months and 1 day after the end of the Corporation Tax accounting period, the company may have to pay a temporary Corporation Tax charge under section 455. The rate is 35.75% for loans made on or after 6 April 2026 (33.75% for loans made from 6 April 2022 to 5 April 2026). It is a company tax charge, not automatically the director's personal tax, and can be reclaimed after the loan is repaid, released or written off, subject to the rules.
What happens if my director's loan exceeds £10,000?
If the loan is more than £10,000 at any point in the tax year and you pay less than HMRC's official rate of interest (3.75% from 6 April 2026), it may be treated as a benefit in kind. This can mean reporting on a P11D, personal tax for the director and Class 1A National Insurance for the company.