Running a limited company comes with a lot of moving parts, and one area that often causes confusion is the Director’s Loan Account, commonly called a DLA. If you’ve ever taken money out of your company that isn’t salary, dividends, or an expense reimbursement, you’ve already used one — even if you didn’t realise it.

Let’s break it down in a friendly, jargon‑free way.

What Is a Director’s Loan Account?

Think of your Director’s Loan Account as a running tally of money moving between you (the director) and your company.

It records:

• Money you put into the company (e.g., paying for expenses personally)
• Money the company pays you that isn’t salary or dividends
• Money you borrow from the company

If the company owes you money, your DLA is in credit.

If you owe the company money, your DLA is overdrawn.

An overdrawn DLA isn’t automatically a problem — but it does come with tax rules you need to be aware of.

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When Does a DLA Become Overdrawn?

Your DLA becomes overdrawn when you take more out of the company than you’ve put in.

For example:

• You take £10,000 from the company during the year
• You only put in £2,000 in expenses

Your DLA is overdrawn by £8,000.

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Tax Implications of an Overdrawn Director’s Loan Account

This is where things get important. HMRC has rules to stop directors treating their company like an interest‑free personal bank account.

There are two main areas of tax to consider:

1. Corporation Tax (Section 455 tax)
2. Personal Tax (benefit‑in‑kind rules)

Let’s break each one down simply.

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1. Corporation Tax: Section 455 Charge

If your DLA is overdrawn by more than £10,000 at the end of your company’s financial year and it isn’t repaid within 9 months, the company must pay Section 455 tax.

How Section 455 Works

• The tax rate is 33.75% of the overdrawn balance.
• It’s paid by the company, not you personally.
• It’s refundable — but only once the loan is fully repaid.

Example

Your DLA is overdrawn by £20,000 at year‑end.

You don’t repay it within 9 months.

Your company must pay:

£20,000 × 33.75% = £6,750 Section 455 tax.

Once you repay the £20,000, HMRC refunds the £6,750 — but this can take months.

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2. Personal Tax: Benefit‑in‑Kind (BIK)

If your DLA is overdrawn by more than £10,000 at any point in the year, HMRC treats it as an interest‑free loan.

Because interest‑free loans are considered a perk, you may have to pay personal tax on the benefit.

What this means:

• You may pay tax through your Self Assessment.
• The company may pay Class 1A National Insurance on the benefit.

This applies even if the loan is repaid before year‑end.

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How to Avoid Problems with an Overdrawn DLA

Here are simple, practical ways to stay on the right side of HMRC:

• Keep accurate records:
  Track every payment in and out — don’t rely on memory.
• Plan withdrawals:
  Use salary and dividends where possible instead of ad‑hoc withdrawals.
• Repay loans within 9 months:
  This avoids the Section 455 charge.
• Don’t let the balance exceed £10,000:
  This avoids benefit‑in‑kind tax.
• Speak to your accountant early:
  A quick chat can save you thousands in unnecessary tax.

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Why This Matters

An overdrawn DLA isn’t “wrong” — it just needs managing.

Handled well, it’s a flexible way to take money from your company.

Handled badly, it can lead to:

• Unexpected tax bills
• Delays in HMRC refunds
• Personal tax charges
• Cash flow issues for the company

A little planning goes a long way.