Many UK directors take money out of their company without realising it counts as a Director’s Loan Account (DLA). A DLA is the official record that tracks every penny you borrow from your company or lend to it. It is not a salary. It is not a dividend. Miss the rules, and your company faces a 33.75% S455 corporation tax charge, benefit-in-kind obligations, and Class 1 National Insurance costs that quietly stack up. So, do you actually know at what point a simple cash transfer starts costing you?
What Is a Director’s Loan?
A director’s loan is money you take from your company that is not classed as your salary, dividends, or legitimate business expenses. It is also not money you previously paid into the company yourself. In short, if you take cash out and it does not fall into any of those three boxes, it is a director’s loan.
Directors sometimes borrow from their company to cover short-term personal costs, like an unexpected bill or a one-off expense. It can be a useful tool, but it must not become a habit. Director’s loans come with strict rules, and breaking them can cost you and your company a lot of money.
What Is a Director’s Loan Account (DLA)?
The Director’s Loan Account (DLA) is a record in your company’s books. It tracks every penny you borrow from the company or lend to it. Think of it as a running tab between you and your business.
Here is how the two states of a DLA work so that you can understand your position at a glance:
When the DLA Is in Credit
If you have put more money into the company than you have taken out, your DLA is in credit. This means the company owes you money. You become a creditor of your own business. This is a safer position to be in.
When the DLA Is Overdrawn
If you have taken out more than you have put in, your DLA is overdrawn. This is where tax risks kick in. Shareholders and other creditors may grow concerned if your DLA stays overdrawn for a long time. You should always try to keep it at zero or in credit.
How Is a Director’s Loan Taxed?
Tax on a director’s loan depends on a few key factors. It matters how much you borrowed, whether you repaid it on time, and what interest rate you charged. Let us walk through each scenario clearly.
The S455 Corporation Tax Charge
If you do not repay your director’s loan within nine months and one day of your company’s financial year-end, HMRC will charge your company S455 tax. This is a corporation tax charge of 33.75% on the outstanding loan balance (or 32.5% if the loan was made before April 6, 2022). Interest on top of this will continue to accrue until you repay the loan or pay the tax.
The good news is that once you fully repay the loan, your company can reclaim the S455 tax. But note that you cannot reclaim any interest charged on it. To reclaim, your company must use form CT600A if reclaiming within two years, or form L2P if reclaiming after two years. This process is handled as part of your Accounts and CT600 filing, which Vital Accountax can manage for you.
Loans Over £10,000 and Benefit in Kind
If you borrow more than £10,000 at any point during the tax year, HMRC treats the loan as a benefit in kind. This means your company must report it on a P11D form, deduct Class 1 National Insurance, and you must declare it on your Self Assessment tax return. Our Self Assessment service ensures you never miss a deadline or a reporting requirement.
Interest Below the HMRC Official Rate
Your company can charge you interest on the loan. But if the interest rate is below the HMRC official rate (currently 3.75% as of March 2026), the difference is also treated as a benefit in kind. You pay tax on the gap, and the company pays Class 1 National Insurance at 15% on it too.
When a Loan Is Written Off
If the company writes off your loan, you pay Income Tax on the full amount through Self Assessment. The company must also deduct Class 1 National Insurance via payroll. Writing off a loan sounds like a clean exit, but the tax cost is often higher than simply repaying it.
Can You Repay and Borrow Again?
You might think you can avoid the nine-month rule by repaying the loan just before the deadline and then taking out a new one straight away. HMRC calls this “bed and breakfasting” and treats it as tax avoidance. You must wait at least 30 days between repaying one loan and taking out another. Even then, HMRC may still challenge it if a pattern emerges.
What If You Lend Money to Your Company?
Director’s loans can also work the other way. If you lend money to your company, you become one of its creditors. Any interest the company pays you is treated as your personal income. You must declare it on your Self Assessment return. The company deducts income tax at source at the basic rate of 20% before paying you. This is worth knowing if you are funding your business through personal savings.
Director’s Loan Account Checklist
Keep this checklist in mind to stay compliant and avoid surprises:
- Only use a director’s loan when you truly need to, not as a routine income source
- Repay the loan within nine months and one day of your company’s year-end
- Keep borrowing below £10,000 to avoid benefit-in-kind rules where possible
- Never repay and immediately re-borrow to dodge the tax deadline
- Always make sure your company has made a real profit before paying dividends, or the payment may be treated as a director’s loan.
- Keep your bookkeeping accurate and up to date with help from Vital Accountax’s bookkeeping service.
Get Expert Help from Vital Accountax
A Director’s Loan Account can be a smart financial tool when used correctly. But the rules around S455 tax, benefit in kind, repayment deadlines, and HMRC reporting are easy to get wrong without the right support.At Vital Accountax, we help limited companies across the UK stay compliant, avoid penalties, and plan their finances with confidence. Whether you need help with your company accounts, self-assessment, or payroll, our team has you covered. Contact us today and let us handle the numbers while you focus on growing your business.
