Most owner-managed companies have a director’s loan account. Most of the time it sits there quietly. When it doesn’t sit quietly, it’s because the year-end has revealed that the director took more out than was available as salary, dividends or expenses, and HMRC are now interested.
This is a short, practical note rather than a comprehensive guide. The technical detail will sit on a future page; this is the version you read in five minutes.
What it is, in one sentence
The director’s loan account (DLA) is an accounting record of money owed between the company and its directors — not a bank account. If you put your own money into the company, the DLA goes in your favour. If the company pays you money that isn’t salary, declared dividends or genuine expense reimbursement, the DLA goes the other way.
Why it goes wrong
Two common patterns. The first is the founder-director who treats the company bank account as their own current account, withdraws money as needed across the year, and intends to “sort it out at year-end.” Sometimes there are profits to declare as dividends to clear the balance; often there aren’t, or not enough. The second is the more disciplined director who declares dividends accurately, but on profits the company didn’t actually have at the point of declaration — an unlawful dividend, which becomes a DLA balance after the auditor or accountant unpicks it.
What HMRC do about an overdrawn DLA
If the DLA is overdrawn at the company year-end and isn’t repaid within nine months, the company pays a section 455 charge — currently a meaningful percentage of the balance, refundable when the loan is repaid. There may also be a benefit-in-kind issue if the loan exceeds £10,000 at any point, with a notional interest charge picked up via the director’s P11D.
None of this is fatal. All of it is avoidable.
What I’d actually do
Look at the DLA every quarter, not annually. Take a sensible salary set in advance, and only declare dividends out of profits you can demonstrate the company had on the date of declaration. Keep a small DLA buffer rather than running it to the line.
If you’ve inherited an overdrawn DLA from a previous year — perhaps from a less attentive bookkeeper — there are tidy ways to clear it. The point of getting an accountant involved early is that the tidy ways tend to be the cheap ones.
If yours needs a look, the easiest thing is a short call.