Key Takeaways
- A director’s loan account records money paid between a director and their limited company outside normal salary, dividends and expense repayments
- If you put more money into the company than you take out, the account will generally be in credit
- If you take out more than you have put in, the account may become overdrawn and you will owe money to the company
- An overdrawn director’s loan account can have tax consequences and may become particularly important if the company enters insolvency
- Keeping accurate records and seeking advice early can help directors avoid unexpected tax or insolvency issues
Director’s loan accounts
Directors’ loan accounts are a notoriously complicated issue for company directors to understand. If you are asking what is a director’s loan account, it is essentially a record of money that a director pays into or takes out of their limited company, excluding transactions such as salary, dividends and legitimate expense repayments.
Unlike sole traders or partnerships where taking money from the business is a straightforward process, withdrawing money from a company is very different. Because the company is a separate legal entity, taking money from it requires more consideration and is also open to more scrutiny.
In this article, we explain how director’s loan accounts work, what happens when an account becomes overdrawn, the potential tax implications and what directors need to consider if their company becomes insolvent.
What is a directors loan account and how does it work?
To put it simply, a director’s loan account (DLA) records transactions between a company and its director that are not normal salary payments, dividends, expense repayments or repayments of money the director has previously paid into the company.
If you do not take money out of the company other than through permitted salary, dividends or expenses, and you have not loaned money to the company, your director’s loan account may have a balance of zero.
If you put your own money into the company to fund trading activities, meet expenses or purchase assets, the account may be in credit. In this situation, the company owes you money and you are effectively a creditor of the company.
However, if you withdraw more money from the company than you have put in, and those withdrawals are not salary, dividends or legitimate expense repayments, your director’s loan account can become overdrawn. This means you owe money back to the company.
What does it mean if the account is overdrawn?
When a director takes money out of a company and the amount exceeds what the company owes them, the director’s loan account becomes overdrawn.
Having an overdrawn director’s loan account does not automatically mean you have done anything wrong. However, the money remains an asset of the company and must be properly recorded and accounted for. Tax consequences can also arise.
If you owe the company more than £10,000 at any point during the tax year, benefit-in-kind rules may apply, particularly where no interest is paid or interest is charged below HMRC’s official rate. This can create personal tax and company National Insurance reporting obligations. HMRC’s official beneficial loan interest rate is 3.75% from 6 April 2026, while the Class 1A National Insurance rate for 2026/27 is 15%.
An overdrawn DLA does not necessarily cause an immediate problem if it is carefully monitored and the director has a realistic plan to repay it. However, failing to understand the tax deadlines or allowing the balance to grow can create additional financial pressure.
What are the tax implications of a director’s loan account?
Tax treatment depends on factors including whether the director is also a shareholder, how much has been borrowed, when it is repaid and whether interest is being charged.
For many owner-managed limited companies, Section 455 of the Corporation Tax Act 2010 can apply where a close company makes a loan to a shareholder or other participator.
If the loan remains outstanding more than nine months after the end of the relevant Corporation Tax accounting period, the company may have to pay a Section 455 tax charge. HMRC’s current guidance states that the rate for loans made on or after 6 April 2026 is 35.75%.
The Section 455 charge can usually be reclaimed when the loan is permanently repaid, released or written off, subject to the relevant rules. However, where repayment takes place after the nine-month deadline, the company normally has to wait until nine months and one day after the end of the accounting period in which the repayment occurred before relief becomes due.
Because director’s loan taxation can become complicated, particularly where balances are repeatedly repaid and redrawn, professional tax advice should be taken where necessary.
Do Director’s Loans Over £10,000 Need Shareholder Approval?
Company law can also apply to director’s loans.
Under the Companies Act 2006, loans to directors generally require approval from the company’s members, although an exemption applies where the aggregate value of the relevant transaction and other relevant arrangements does not exceed £10,000.
Directors should therefore make sure any larger loan is properly authorised and recorded rather than simply withdrawing money without considering the company law requirements.
Overdrawn director’s loan accounts and insolvency
If a company becomes insolvent, an overdrawn director’s loan account can become particularly important. It is relatively common for directors of owner-managed companies to withdraw money with the intention of repaying it later. However, if the company subsequently experiences serious financial difficulty, the outstanding loan remains an asset belonging to the company.
If the company enters liquidation, the liquidator can seek repayment of money owed by a director so that those funds can be made available to creditors. If the director cannot afford to repay the balance, there may also be consequences for their personal finances.
Importantly, becoming insolvent does not automatically mean that a company must stop trading immediately. However, when a company is insolvent, directors’ responsibilities shift towards protecting creditors. Directors should protect company assets, avoid worsening creditors’ position and consider seeking advice from a licensed insolvency practitioner.
A director’s conduct may also be reviewed during a formal insolvency process. An overdrawn DLA does not in itself amount to wrongful trading, but directors can potentially face consequences where they knew, or ought to have concluded, that insolvent liquidation or administration could not reasonably be avoided and failed to take appropriate steps to minimise losses to creditors.
If your company is facing insolvency and you have an overdrawn director’s loan account, McAlister & Co can help you understand how the balance may be treated and what options are available.
Top tips for managing a director’s loan account
When it comes to managing your DLA, one of the most important steps is keeping accurate and organised records.
Make sure that any money put into the business and any money taken out is properly documented. This makes it easier to understand whether the account is in credit or overdrawn and helps prevent the balance from spiralling out of control.
You should also:
- Regularly review the balance of your director’s loan account
- Clearly record personal withdrawals and money paid into the company
- Understand the tax consequences before taking substantial sums from the company
- Check whether shareholder approval is required for a proposed loan
- Have a realistic plan for repaying an overdrawn account
- Make sure the balance is correctly reflected in the company’s annual accounts
- Seek professional advice if the company is experiencing financial difficulty
McAlister & Co recommends addressing an overdrawn DLA as early as possible, particularly if the company is also struggling with HMRC arrears, creditor pressure or wider cash flow problems.
Want to learn more?
If you have questions about your director’s loan account or need help understanding how an overdrawn DLA could affect an insolvent or financially distressed company, contact McAlister & Co today.
As experienced insolvency practitioners, McAlister & Co can assess your company’s financial position, explain how an outstanding director’s loan may be treated and help you understand the options available.
If you started this guide by asking what is a director's loan account, the key point is that it records money moving between you and your limited company and can have important tax and insolvency consequences if it becomes overdrawn. The sooner you seek advice, the more options McAlister & Co may be able to help you explore.
Frequently Asked Questions
What Is a Directors Loan Account in Simple Terms?
A director’s loan account is a record of money passing between a director and their limited company outside normal salary, dividends and legitimate expense repayments. If the director puts more into the company than they withdraw, the account may be in credit. If they take out more than they have put in, it may become overdrawn.
Is an Overdrawn Director’s Loan Account Illegal?
No, an overdrawn director’s loan account is not automatically illegal. However, company law, tax and reporting requirements can apply. Larger loans may also require shareholder approval, and the money remains repayable to the company.
How Long Does a Director Have to Repay a Loan?
A director’s loan can technically have repayment terms agreed with the company, but important tax consequences can arise if certain loans remain outstanding more than nine months after the end of the relevant Corporation Tax accounting period.
What Happens to a Director’s Loan if the Company Goes Into Liquidation?
If the director owes money to the company, the overdrawn balance is generally treated as an asset of the company. A liquidator can pursue repayment so the money can be made available to creditors.
Can a Director’s Loan Be Written Off?
A company may in some circumstances release or write off a director’s loan, but doing so can create tax and National Insurance consequences. If the company is insolvent, additional considerations will apply because directors must prioritise creditors’ interests. Professional advice should be taken before writing off an outstanding DLA.
