Director’s loan accounts: borrowing, lending and tax

1. Start with who owes whom

A director’s loan account (DLA) records money owed between you and your limited company. You and the company are separate legal persons, even if you own all its shares.

• In credit: the company owes you money, usually because you have lent it funds or paid company expenses yourself.
• Overdrawn: you owe the company money, usually because you have taken money out or it has paid personal costs for you.

Salary, properly declared dividends and genuine expense reimbursements have their own treatment. They should not be left as unexplained withdrawals.

Example: you lend the company £8,000 and later take back £3,000. It still owes you £5,000. If you then withdraw another £7,000 without a salary, dividend or expense entitlement, you owe it £2,000.

2. Keep a running account

Keep a separate account for each director. Record every payment in or out, its date, what it was for and the supporting document. Reconcile the balance to the bank and bookkeeping regularly.

Include personal purchases paid by the company and business expenses you paid yourself. Before crediting salary or a dividend, check that it has actually been earned or lawfully declared and that the payroll or dividend records support it.

Retain the year-end balance, repayments after year end and the highest balance during the personal tax year. These figures answer different tax questions.

3. Agree the loan before taking the money

An overdrawn DLA is not automatically unlawful. The Companies Act 2006 replaced the earlier general prohibition with an approval framework. For an ordinary loan to a director, shareholder approval is generally required above £10,000, subject to the statutory exceptions and rules for linked transactions.

If you are the sole shareholder, you can usually give the approval yourself. Keep a written resolution and the required loan details; owning the company does not remove the paperwork.

Record the amount or limit, purpose, interest terms and repayment date. Check the company can afford the loan and still pay its bills. Approval does not remove your duties as a director or any tax charge.

4. Check whether section 455 applies

Section 455 usually matters where a close company lends to a shareholder or another participator, or an associate such as a family member. A director who owns shares will normally be a participator. Being a director alone does not automatically bring every loan within section 455.

Broadly, a close company is controlled by five or fewer participators, or by participators who are directors. There is also a test covering who would receive more than half its assets on winding up. Most small owner-managed limited companies are close companies.

A participator has a share or interest in the company; the definition is wider than shareholder. Your accountant should check unusual ownership arrangements and any exemptions.

5. Work out the company’s section 455 bill

A qualifying loan made in an accounting period and still outstanding at its end needs review. Repayment within nine months can give relief before payment is due. Any section 455 tax payable is due nine months and one day after the accounting period ends.

• Loans made from 6 April 2026: 35.75%.
• Loans made from 6 April 2022 to 5 April 2026: 33.75%.

The loan date determines the rate. An account containing loans from both periods may need both rates. The company does not pay the same section 455 charge again each year on an unchanged loan already charged.

Example: the company lends you £20,000 on 1 July 2026 and has a 31 December 2026 year end. You genuinely repay £8,000 by 30 September 2027 and make no further withdrawals. The remaining £12,000 produces a £4,290 charge, payable on 1 October 2027.

The simple calculation works for this example. With repeated withdrawals, repayments or older balances, your accountant must track the loans and allocate repayments correctly. Comparing just two closing balances can give the wrong answer.

Section 455 is paid by the company. There is no general £10,000 exemption from this charge for a shareholder-director. Paying interest on the loan does not remove it.

6. Check your separate benefit-in-kind position

An interest-free or cheap loan can also create a taxable employment benefit for you. This calculation follows the personal tax year, 6 April to 5 April, rather than the company’s year end.

The small-loan exemption generally applies if the combined outstanding balance of the relevant employment-related loans never exceeds £10,000 during the tax year. If it exceeds that limit, the calculation covers the loan benefit, not just the amount above £10,000.

HMRC uses its official interest rate, not a bank’s market lending rate. The benefit is broadly the interest at that rate less qualifying interest you actually pay. Check the official rate or rates for the period concerned.

The normal averaging method uses the opening and closing balances, adjusted for how long the loan existed. The alternative precise method uses daily maximum balances. You can elect for the precise method, and HMRC can require it.

Charging interest can reduce or eliminate the benefit if the amount paid covers the official-rate calculation. The obligation to pay interest must exist during the relevant tax year, and payment must meet HMRC’s conditions. Simply adding an interest charge to the account needs careful checking.

For a reportable beneficial loan, the company normally files a P11D and P11D(b) by 6 July after the tax year and pays Class 1A National Insurance by 22 July electronically (19 July otherwise). You pay Income Tax on the benefit. Repaying before the section 455 deadline does not erase a benefit that arose earlier.

7. Choose a genuine way to repay

You can transfer personal money to the company. A properly declared dividend or net salary or bonus can also be credited against the debt, with its own tax consequences.

A dividend needs sufficient distributable profits and the correct approvals and records. Salary or a bonus needs payroll treatment, including PAYE and National Insurance where applicable. Record the real date; do not backdate either to make a deadline appear met.

Temporary repayments followed by fresh borrowing can be caught by anti-avoidance rules, often called “bed and breakfasting”. Broadly, repayments of £5,000 or more and new borrowing of £5,000 or more within a 30-day period can be matched against each other, with the new loan falling in a later accounting period than the original.

A separate arrangements rule can apply where at least £15,000 is outstanding before repayment and there are arrangements to borrow at least £5,000 again. Waiting 31 days does not automatically solve this. Ask your accountant to review the full sequence, including any exceptions.

8. Claim relief when the loan is cleared

Repayment within nine months of the accounting-period end can mean the company never physically pays section 455 tax. The loan and relief still need the appropriate Company Tax Return disclosures, usually on CT600A.

If repayment is later, relief is deferred until nine months and one day after the end of the accounting period in which repayment takes place. A release or write-off can also qualify for section 455 relief, but creates a separate personal tax question.

Keep evidence and claim the relief. HMRC does not automatically refund the tax when you repay. The claim normally has to be made within four years of the end of the financial year in which repayment, release or write-off occurs. Interest charged for paying section 455 late is not refundable.

9. If you lend money to the company

Your company does not pay Corporation Tax simply because you lend it money. Record the amount as a debt owed to you, with agreed repayment and interest terms.

Repayment of genuine loan principal is normally tax-free for you. It is not a salary or dividend and does not become a deductible company expense just because cash leaves the bank.

You can lend interest-free. If you charge interest, it is personal income for you and can be a company business expense, subject to the tax deduction rules.

For the usual loan by a UK individual director, the company must deduct 20% Income Tax from the interest, pay you the balance and account for the deduction using CT61 for the relevant quarterly period.

Example: on £1,000 gross interest, the company pays you £800 and accounts to HMRC for £200. On your Self Assessment return, report the £1,000 interest and £200 tax deducted. Your final tax depends on your income and available savings allowances; 20% is not necessarily the final liability.

If the company cannot repay, check its finances before withdrawing money. A credit DLA does not guarantee recovery in an insolvency.

10. If the company writes off what you owe

A company can formally release a director’s debt, but it needs a properly authorised and documented decision. A bookkeeping entry clearing the balance is not enough to settle the legal and tax position.

For a close-company loan to a participator or associate, the amount released or written off is generally taxed as dividend income under section 415 of the Income Tax (Trading and Other Income) Act 2005. Report it on your personal tax return.

If you are also a director or employee, Class 1 National Insurance may arise, with reporting obligations for the company. Other employment rules can apply where the borrower is not a participator. The company generally cannot deduct the participator loan write-off from its taxable profits.

Section 455 relief does not make the write-off tax-free. Compare the total cost of repayment, salary, a lawful dividend and a write-off before deciding. If the company is insolvent, a liquidator may pursue an overdrawn DLA.

11. What to send your accountant

• The reconciled DLA ledger and supporting bank statements.
• Dates and amounts of loans, repayments and fresh withdrawals.
• The highest combined loan balance during each personal tax year.
• Loan terms, shareholder approval and evidence of interest paid.
• Payroll records and dividend paperwork for amounts credited.
• Earlier CT600A returns, section 455 payments and relief claims.

Review the account while there is time to act. A repayment plan agreed during the year is easier to manage than an unexplained balance discovered when the tax return is being prepared.

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