A director’s loan account — often shortened to DLA — is one of those concepts that catches a surprising number of limited company directors off guard. You set up a company, you need some cash, you transfer money from the business account to your personal account, and you don’t think much of it. But in the eyes of HMRC, that transaction has a name and a set of rules attached to it.

Understanding what a director’s loan account is matters because the tax consequences of getting it wrong are real and potentially expensive. The rules aren’t especially complicated once you know them, but they’re specific enough that it’s worth taking the time to understand them properly rather than discovering a problem at year-end.

Below, we walk through what a DLA actually is, what happens when it’s overdrawn, what the interest rules look like, and how to stay on the right side of HMRC.

A director’s loan account is a running record of all the money that flows between you as a director and your limited company — specifically, money that isn’t salary, dividends, or the repayment of legitimate expenses you’ve already incurred on the company’s behalf.

If you put your own money into the company — say, to cover a cash-flow gap when you first started — that’s recorded in the DLA as money the company owes you. If you take money out for personal use beyond your agreed salary and dividends, that’s recorded as money you owe the company.

The account is sometimes described as being in credit (the company owes you) or overdrawn (you owe the company). Those two states are treated very differently by HMRC, and it’s the overdrawn position that tends to create problems.

At your company’s financial year-end, whatever balance sits on the DLA must be reflected accurately on your balance sheet in the annual accounts. This isn’t optional or administrative housekeeping — it’s a legal requirement. If you work with an accountant, they’ll be looking at this as a matter of course. If you don’t, it’s easy for the balance to quietly accumulate without you realising the exposure you’re building up.

An overdrawn DLA means you’ve taken more out of the company than you’ve put in or been paid legitimately. The company has, in effect, lent you money.

HMRC’s position is straightforward: if that loan isn’t repaid within nine months and one day of your company’s accounting year-end, the company faces a Corporation Tax charge under what’s known as Section 455. This charge is currently 35.75% of the outstanding loan balance — a rate that increased from 33.75% when the 2026/27 tax year began in April 2026.

That’s a significant hit, and it’s worth emphasising that it sits on top of any Corporation Tax the company already owes on its profits. Interest also accrues on unpaid Section 455 tax until either the loan is repaid or the tax is settled.

The good news is that Section 455 tax is repayable. Once you repay the loan (or the company writes it off), the company can reclaim the tax paid — but you have to wait until nine months and one day after the end of the accounting period in which the repayment was made before you can make that claim. The interest, however, is gone for good.

It’s also worth knowing that HMRC has become more attentive to DLA positions in recent years, introducing new reporting tools and scrutinising overdrawn accounts more closely at enquiry stage.

There’s an additional consideration if the outstanding balance on your DLA exceeds £10,000 at any point during the tax year. At that level, the loan is treated as a benefit in kind and needs to be reported to HMRC accordingly.

What this means in practice is that the company will need to report the benefit on a P11D form and pay Class 1A National Insurance on the deemed value of that benefit. The value of the benefit is calculated based on HMRC’s official interest rate — which for 2026/27 sits at 3.75% per annum.

You can sidestep this by charging the company’s official rate of interest on any loan above £10,000. If you pay interest at or above HMRC’s rate, there’s no benefit in kind to report. In practice, many directors don’t bother — especially when the balance is only temporarily high — but it’s a detail that can catch people out if they’re not across the rules.

It’s also worth being aware that any loan written off or released by the company doesn’t disappear from a tax perspective. If the company decides it’s simply not going to collect the debt, the amount is treated as employment income in your hands, meaning you’d pay Income Tax on it through your Self Assessment return, and the company would owe Class 1 National Insurance on it too.

Not all DLA positions are problematic. If you’ve lent money to your company — which is common in the early stages of a business — the DLA sits in credit and the company effectively owes you that money back.

You can draw that balance down tax-free at any point, because you’re simply recouping money you already put in. There’s no tax charge on repayment of a loan you made to the company.

If the company pays you interest on that loan, the position is slightly different. The company can generally deduct the interest as a business expense, which is useful from a Corporation Tax perspective. But you’d need to declare the interest received as income on your Self Assessment return and pay tax on it at your marginal rate.

In our experience, directors who’ve injected cash into their companies early on sometimes forget to track this properly — and then miss the opportunity to draw those funds back without any tax consequences. Keeping clean records from the outset makes this straightforward to manage. A well-maintained DLA in Xero, for example, means you always know exactly where you stand.

A director’s loan account isn’t inherently problematic. Directors dip in and out of them all the time for entirely legitimate reasons — covering a short-term cash need, for example, before dividends are declared at year-end. The issue is when the account goes overdrawn and stays that way past the nine-month deadline without anyone noticing.

A few habits make a significant difference:

• Record every transaction correctly — whether you’re putting money in or taking it out, it needs to be categorised properly in your bookkeeping, not lumped under a vague expense.
• Know your year-end date — the nine-month repayment window runs from the end of your Corporation Tax accounting period, not the calendar year. If your year-end is 31 March, you have until 1 January to repay.
• Plan dividend declarations carefully — sometimes what looks like an overdrawn DLA can be resolved cleanly by declaring a dividend before year-end, if the company has sufficient distributable profits to do so.
• Don’t write loans off casually — it feels like a simple solution, but a written-off director’s loan creates an Income Tax liability and triggers National Insurance obligations for the company.

If you’re unsure where your DLA stands heading into year-end, that’s exactly the kind of conversation to have with your accountant before the deadline passes, not after.