What Is an Overdrawn Directors’ Loan Account – And Why Does It Matter?

If you’re a company director or shareholder, there’s something important you need to know: taking money out of your company without the right planning can lead to unexpected tax bills. One of the most common traps? An overdrawn directors’ loan account.

Let’s break it down.

What Is a Directors’ Loan Account (DLA)?

A directors’ loan account is a record of money moving between you and your company – that isn’t salary, dividends or business expenses.

It keeps track of:

  • Money you take out of the company (but isn’t officially income), and
  • Money you lend to the company.

If you take more out than you put in, your DLA becomes overdrawn. In simple terms:
➡️ You owe your company money.

Why Is This a Problem?

HMRC sees an overdrawn DLA as a potential tax issue – especially if you don’t repay it on time.

Here’s what can happen if it’s not dealt with properly:

  1. Tax Charges for Your Company

If your loan isn’t repaid within 9 months of the company’s year-end, the company has to pay a special tax called Section 455 tax.

  • It’s charged at 33.75% of the loan amount.
  • The company can reclaim this tax, but only when the loan is fully repaid – which could take years.
  • In the meantime, it’s money tied up that could be used elsewhere in the business.
  1. Personal Tax Bills for You

If the loan goes over £10,000 at any point in the tax year:

  • HMRC may treat it as a benefit in kind – similar to getting a perk from your company.
  • This means:
    • It must go on a P11D form.
    • You may have to pay personal tax on it through your tax return.
  • If you don’t pay interest on the loan – or charge less than HMRC’s official rate – there could be extra tax due on the difference.

How to Stay on the Right Side of HMRC

To avoid nasty surprises, here’s what we recommend:

✅ Don’t treat your company’s money like your own. Keep personal and business finances separate.
✅ Keep clear records of everything you take out and repay.
✅ Repay loans within 9 months after your financial year ends to avoid Section 455 tax.
✅ Speak to your accountant early if your DLA is overdrawn – there may be tax-efficient ways to deal with it.

Please also see: https://www.gov.uk/directors-loans

Final Thought

Directors’ loan accounts aren’t a problem on their own – but when they’re overdrawn and unmanaged, they can cause headaches for both your business and your personal tax position.

The key is knowing the rules and getting ahead of any issues.
If you’re unsure about your loan account or want a quick health check, we’re here to help.

Get in touch today – and let’s keep your finances clean, clear and compliant.

Please see another An Accounting Gem blog:  https://www.aag-accountants.co.uk/how-to-cope-with-rising-prices-when-your-income-isnt-budging/

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