The director's loan account: how an overdrawn balance triggers a 33.75% tax charge


The director's loan account is one of the most useful and most misunderstood features of running a limited company. Used properly, it is a flexible way to move money between the director and the company. Used carelessly, it triggers a tax charge of 33.75 percent that surprises directors every single year.

What the director's loan account actually is

The director's loan account (DLA) records money moving between the company and its directors outside of salary and dividends. If the director lends money to the company, the account is in credit. If the director takes money out that is not salary or dividends, the account is overdrawn, which means the director owes the company money.

The 9-month rule and the 33.75% charge

If the director's loan is still overdrawn 9 months and 1 day after the company's year-end, the company must pay section 455 tax at 33.75 percent of the outstanding balance. This is not the director's personal tax; it is a company liability, paid with the corporation tax. The charge is repayable when the loan is repaid, but relief is slow, given 9 months and 1 day after the end of the accounting period in which the loan was repaid. There is also a bed-and-breakfasting rule: repaying the loan just before the deadline and re-borrowing shortly after does not escape the charge.

The £10,000 benefit-in-kind threshold

If the overdrawn balance exceeds £10,000 at any point in the tax year and the loan is interest-free or below HMRC's official rate, the director faces a benefit-in-kind charge. The company must report it on a P11D and pay Class 1A National Insurance on it. Directors often trip this threshold without realising, because the test looks at the peak balance during the year, not the year-end figure.

The legal side directors forget

An overdrawn director's loan is a breach of the Companies Act unless properly handled. Loans to directors require shareholder approval above £10,000, and the loan must be disclosed in the company's accounts. If the company later goes insolvent with an outstanding director's loan, the liquidator will pursue the director personally for repayment.

Keeping the account healthy: the routine

Review it monthly as part of the management accounts review. Clear it before the 9-month deadline, using dividends where there are sufficient distributable profits and the paperwork is done properly. Charge interest at or above HMRC's official rate if a loan genuinely needs to stay outstanding, to avoid the benefit-in-kind charge. Document everything: board minutes, shareholder approval where required, and a clear repayment plan.

The bottom line

The director's loan account is a tool, not a trap, but only for directors who monitor it. Getting the monthly review habit right is what professional bookkeeping and tax compliance support is for. Finex Outsourcing keeps director loan accounts monitored as part of its routine management accounts work for UK companies.


 

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