Director's loan account: how it works, the tax rules and a worked example

Short answer: a director’s loan account (DLA) is the running record of money that moves between a UK limited company and one of its directors that is not salary, dividends or a repaid expense claim. When the director puts money in, or the company owes them, the account is in credit and the company owes the director. When the director takes out more than they are owed, the account is overdrawn and the director owes the company. An overdrawn balance still owed nine months and one day after the company’s year end triggers a company tax charge, known as s455 tax, of 33.75% of the balance (35.75% on loans made from 6 April 2026), and a balance over £10,000 at any time can be a taxable benefit for the director. A full year of entries is worked through below.

This guide covers UK limited companies. Sole traders and partners have no director’s loan account (money they take out is drawings), and Australia’s rules for company loans to owners work differently: see Division 7A loans explained.

What goes through it

Entry	Effect on the account	Example
You lend the company money	Credit: the company owes you	£2,500 to cover the first months’ costs
You pay a business cost personally and it is not repaid yet	Credit	A software subscription on your own card
A dividend is declared but not paid out in cash	Credit	Dividend voted at the year end and left in the account
You take money that is not salary or a paid dividend	Debit: you owe the company	A monthly transfer to your personal account
The company pays a personal bill for you	Debit	Your car insurance paid from the business account

Salary through payroll and dividends paid as dividends do not belong here. The account exists for everything else, which in a small company usually means regular transfers that were never formally a salary or a dividend.

The tax rules for an overdrawn account

• s455 tax (the company pays it). If the account is overdrawn at the company’s year end and still owed nine months and one day later, the company pays tax of 33.75% of the unpaid amount (35.75% for loans made on or after 6 April 2026, after the November 2025 Budget raised dividend tax rates). The deadline is the same day corporation tax for that year is due. It is not a fine: the company can reclaim it once the loan is repaid or properly cleared, but only nine months and one day after the end of the year in which that happens, so the cash can be tied up for well over a year.
• Benefit in kind (the director pays it). If the overdrawn balance goes over £10,000 at any point in the tax year and the director pays less interest than HMRC’s official rate (3.75% for 2025/26, and 3.75% from 6 April 2026 for 2026/27; HMRC reviews it each quarter), the unpaid interest is a taxable benefit. The director pays income tax on it, the company pays Class 1A National Insurance, and it goes on the P11D. A loan that never goes over £10,000 avoids this, even if it is overdrawn.
• Paying it off and borrowing it back. HMRC ignores a repayment of £5,000 or more if the director borrows £5,000 or more again within 30 days, so clearing the balance just before the deadline and taking it straight back out does not avoid s455.
• Writing it off. If the company writes the loan off, the director is taxed on the amount as if it were a dividend, and Class 1 National Insurance is usually due as well. It is a decision for your accountant, not a tidy-up.

The rates and thresholds change with Budgets. Check the current year’s figures with your accountant before acting on them.

A worked example

A one-director web design company in Sheffield, year end 31 March 2026. The director has no payroll salary and takes £1,500 a month by bank transfer, intending to “sort it out with a dividend at the year end”.

Month	Entry	Movement	Running balance
Opening	Lent to the company when it started	+£2,500	+£2,500
April	Monthly transfer	−£1,500	+£1,000
May	Monthly transfer; car insurance paid by the company	−£2,400	−£1,400
June	Monthly transfer; expense claim owed to the director	−£900	−£2,300
July to November	Monthly transfers (5 × £1,500)	−£7,500	−£9,800
December	Monthly transfer	−£1,500	−£11,300
January to March	Monthly transfers (3 × £1,500)	−£4,500	−£15,800
31 March	Dividend declared and credited to the account	+£12,000	−£3,800

Over the year the account had £15,100 of credits (the £2,500 loan, the £600 expense claim and the £12,000 dividend) and £18,900 of debits (£18,000 of transfers and the £900 insurance), so it ends £3,800 overdrawn. Three things follow:

1. s455. If the director has not repaid the £3,800 by 1 January 2027 (nine months and one day after 31 March 2026), the company owes £1,282.50 of s455 tax (£3,800 × 33.75%) with its corporation tax. Repaying it by then, from personal money or a further dividend the company has the retained earnings to pay, means no charge. If the same pattern repeats in the year to 31 March 2027, those loans fall under the new rate: £3,800 × 35.75% = £1,358.50.
2. Benefit in kind. The balance passed £10,000 overdrawn in December and peaked at £15,800. No interest was charged, so the director has a taxable benefit for the tax year, which the year-end dividend does not undo. The accountant works out the figure from the balances and HMRC’s official rate.
3. The dividend has to be real. £12,000 can only be declared if the company has that much profit kept after tax. If it does not, the dividend is unlawful and the balance is really £15,800 overdrawn. This is the most common way a DLA goes wrong: a year of transfers, and not enough profit at the year end to cover them. The corporation tax calculator shows how much of the year’s profit is left once the tax is taken off.

The fix for next year is cheap: decide in April how the director will be paid (a salary through payroll, dividends declared as the profit is made, or both), and stop the untagged monthly transfer. Salary vs dividends works out the 2026-27 split. How to pay dividends, and record them in Xero walks through the profit and cash checks, the paperwork and the entries.

Checking yours in Xero

Most UK companies in Xero have a liability account for each director, named something like Director’s Loan Account or Directors’ Current Account. If yours does not, ask your bookkeeper or accountant to add one per director before anything else is coded to it.

1. Open Reports and run the Balance Sheet for today. Find the director’s account under liabilities. A positive figure means the company owes the director; a negative liability means the account is overdrawn and the director owes the company. How to read your Balance Sheet in Xero explains the layout.
2. To see every entry, run the Account Transactions report for that account over the year. Each transfer, personal bill and dividend appears with its date, which is what your accountant needs at the year end.
3. Watch for transfers coded somewhere else. A transfer to the director coded to “Wages” with no payroll behind it, or to a general expense, makes profit look lower and the DLA look better than it is. The Xero trial balance lists every account in one place, so an odd balance stands out.
4. Run the Balance Sheet with a comparison column for a year ago. A DLA that moves further overdrawn every year usually means the director is taking out more than the company makes, which how much can I pay myself? helps you size properly.

Money taken through the DLA still leaves the bank, so it is one of the reasons a profitable company can be short of cash; profit in Xero but no cash in the bank shows how to find the others.

Common mistakes

• Treating the company account as your own. Every personal payment from the business account is a debit on the DLA, whether or not anyone codes it there.
• Counting on a dividend that the profit cannot pay. Check the profit kept after tax before the year end, not after.
• Forgetting the £10,000 line. s455 looks at the year-end balance; the benefit in kind looks at the balance at any time, so a large mid-year overdraft costs tax even if it is cleared by the year end.
• One account for two directors. Each director needs their own, because the limits and the tax apply per person.

Common questions

Is a director’s loan account an asset or a liability? It depends on the balance. When the company owes the director it is a liability on the Balance Sheet. When the director owes the company it is an asset, because it is money the company is owed. Xero usually keeps it as one liability account, so an overdrawn balance shows as a negative liability.

Can I take money out of my limited company whenever I want? You can take it, but unless it is a salary through payroll or a dividend backed by kept profit, it is a loan from the company and goes on your director’s loan account. If it is still owed nine months and one day after the year end, the company pays s455 tax on it.

What is the s455 tax rate? 33.75% of the overdrawn balance for loans made before 6 April 2026, and 35.75% for loans made on or after that date. The company pays it with its corporation tax and can reclaim it after the loan is repaid.

How long do I have to repay a director’s loan? To avoid s455 tax, by nine months and one day after the end of the company’s accounting year, which is the same day that year’s corporation tax is due. There is no other legal deadline, but a balance over £10,000 can be a taxable benefit for as long as it stays that high.

Is a director’s loan account taxable if it is in credit? No. Money the company owes you is your own money being repaid, so taking it out is not taxed. If the company pays you interest on it, that interest is taxable income for you and a cost for the company.

Does an overdrawn director’s loan account matter if the company is closing or in trouble? Yes. If the company becomes insolvent, the liquidator can ask the director to repay the overdrawn balance to the company’s creditors. Talk to an accountant early if the balance is large.

Seeing it every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and last year, cash in the bank, who owes you and bills due soon. It does not track the director’s loan account itself, but seeing cash beside profit every week makes money leaving faster than the company earns it hard to miss, and that is often where an overdrawn DLA first shows up. It asks Xero for read-only access, and there is a 14-day free trial with no card, then plans start at US$19 a month.