Director’s Loan Account: What It Is and How It Works
Taking money out of a limited company or paying your own money into it can create a balance between you and the business. A director’s loan account records these transactions and shows whether you owe the company money or the company owes you.
It is important to keep this account accurate. An unexpected overdrawn balance can result in tax charges and repayment demands, while an in-credit balance can affect your position if the company later experiences financial difficulty.
💡 Quick Answer
A director’s loan account is the company’s record of money paid between a director and the business that is not salary, a dividend, an expense repayment or the repayment of money previously introduced. If the account is in credit, the company owes the director. If it is overdrawn, the director owes the company. Accurate records are essential because an overdrawn balance may create company and personal tax consequences.
What is a director’s loan account?
A director’s loan account, commonly shortened to DLA, is an accounting record of money moving between a director and their limited company.
It is not necessarily a separate bank account. It is normally maintained within the company’s accounting records, with the balance increasing or decreasing as transactions take place.
The account may record:
- Money the director pays into the company
- Business costs paid personally by the director
- Money withdrawn by the director that is not salary or a dividend
- Personal expenses paid by the company
- Repayments made by either the company or the director
- Interest charged on money lent to the company
- Salary or dividends credited to the account after they have been properly declared and recorded
A separate account should generally be maintained for each director.
What does not count as a director’s loan?
Money received by a director will not normally be treated as a director’s loan if it is:
- Salary or a bonus processed through payroll
- A dividend lawfully declared from distributable profits
- Reimbursement of a genuine business expense
- Repayment of money the director previously lent to the company
Correctly identifying each transaction matters. Calling a payment a dividend does not make it one if the company lacked sufficient distributable profits or the dividend was not properly declared.
Is the director’s loan account in credit or overdrawn?
Director’s loan account in credit
An in-credit balance means the company owes money to the director.
This may happen when the director:
- Provides start-up funding
- Pays company bills personally
- Leaves money in the business
- Does not immediately reclaim business expenses
- Lends the company money to support cash flow
The company can normally repay the amount it owes, subject to its financial position and the accuracy of its records.
If the director charges interest, that interest is a business expense for the company and personal income for the director. The company must normally deduct Income Tax at the basic rate and report it to HMRC using form CT61.
Overdrawn director’s loan account
An overdrawn balance means the director owes money to the company.
This can arise when the director:
- Withdraws money for personal use
- Uses a company card for private expenditure
- Takes drawings that exceed salary and valid dividends
- Receives an unlawful or incorrectly calculated dividend
- Borrows money directly from the company
An overdrawn account can create additional tax and reporting obligations. If your balance is overdrawn, read our detailed guide to an overdrawn director’s loan account.
How does a director’s loan account work?
Every relevant payment should be entered into the account when it occurs.
For example, suppose a director pays £5,000 of company expenses personally. The account may become £5,000 in credit because the company owes that amount to the director.
If the company later repays £2,000, the remaining credit balance would be £3,000.
If the same director subsequently withdraws £4,000 for personal use, the credit would be used first. The account would then become overdrawn by £1,000, meaning the director owes £1,000 to the company.
The position can therefore change throughout the year. Directors should not wait until the annual accounts are prepared to find out what the balance is.
What records should the company keep?
The company should maintain a clear record of all money borrowed from or paid into the business by a director. The year-end balance must also be reflected in the company’s annual accounts.
Good records should identify:
- The date of each transaction
- The amount paid or withdrawn
- The purpose of the payment
- Whether it was personal or business expenditure
- Any repayment made
- Salary or dividends credited to the account
- Interest charged or paid
- The running balance
Receipts, bank statements, expense claims, dividend paperwork and relevant board records should support the entries.
Regularly reconciling the DLA with the company bank account can prevent small bookkeeping errors from developing into significant tax or repayment problems.
Can a director take money from the company whenever they want?
A company’s money belongs to the company, even where one person is both its sole director and sole shareholder.
A director should therefore establish the correct legal and accounting basis for any payment before taking it. Depending on the circumstances, the payment might be:
- Salary
- A dividend
- Reimbursement of an expense
- Repayment of money previously lent
- A new director’s loan
Salary must be dealt with through payroll. Dividends require sufficient distributable profits and appropriate company records. Anything else taken for personal use may need to be recorded as a loan.
Treating the company bank account as a personal account can leave the director with an unexpectedly large overdrawn balance.
Do you pay tax on a director’s loan account?
When the company owes the director
Money originally lent to the company is not itself company income, and the company does not pay Corporation Tax simply because the director provided the funds.
If the director charges interest:
- The interest is normally a business expense for the company
- The interest is personal income for the director
- The director must report it through Self Assessment
- The company must normally deduct basic-rate Income Tax
- The company must report and pay the deduction using form CT61
The tax treatment of the interest should be checked with the company’s accountant.
When the director owes the company
An overdrawn balance may lead to:
- A section 455 Corporation Tax charge for the company
- Benefit-in-kind treatment in certain circumstances
- Personal Income Tax if the loan is released or written off
- National Insurance obligations for the company
- Interest and reporting requirements
- A repayment claim if the company becomes insolvent
These issues are covered in more detail in our overdrawn director’s loan account guide.
Can salary or dividends clear a director’s loan?
A director may sometimes reduce an overdrawn balance by crediting a valid salary, bonus or dividend to the account.
However, the underlying payment must be lawful and properly recorded.
A dividend can only be declared where the company has sufficient distributable profits. It should not be used simply as a retrospective label for money already withdrawn when the necessary profits or paperwork did not exist.
Salary and bonuses must be processed through payroll, with the appropriate PAYE and National Insurance treatment.
Before using either option, the company should check:
- Its available distributable reserves
- Its cash-flow position
- The director’s personal tax position
- Payroll and National Insurance costs
- Whether the company is solvent
- Whether the proposed treatment is properly documented
What happens to a director’s loan if the company is insolvent?
The treatment depends on the balance.
The company owes the director
A director with an in-credit DLA may be a creditor of the company. If the company enters liquidation, the director may need to submit a claim for the amount owed.
Unless the debt is supported by valid security, the director will usually rank as an unsecured creditor. Repayment is not guaranteed and will depend on the assets available after the costs and higher-ranking claims have been dealt with.
Directors should be cautious about repaying themselves ahead of other creditors when the company is insolvent or approaching insolvency. Decisions made at this stage may later be reviewed.
You can read more about director duties when facing insolvency.
The director owes the company
An overdrawn DLA is normally treated as an asset belonging to the company. A liquidator may investigate the account and seek repayment from the director.
The fact that the director owns shares in the company does not automatically cancel the debt. The liquidator must consider the interests of creditors and may examine withdrawals, repayments, dividends and supporting records.
Taking early advice can provide more options than waiting until liquidation has started.
How can directors manage a DLA properly?
- Keep business and personal spending separate.
- Record transactions as soon as they occur.
- Review the running balance each month.
- Keep receipts and explanations for payments.
- Process salary through payroll.
- Confirm that distributable profits exist before declaring dividends.
- Document money lent to the company.
- Agree and record any interest arrangements.
- Ask the accountant to review the balance before the financial year-end.
- Seek early advice if the account is overdrawn and the company is struggling.
A monthly review is particularly useful for owner-managed companies where directors regularly pay expenses personally or make withdrawals throughout the year.
When should you get advice?
Professional advice should be considered if:
- You do not know whether the account is in credit or overdrawn
- A large balance has developed unexpectedly
- The company cannot pay its debts when they fall due
- The company may not have had sufficient profits for previous dividends
- You cannot afford to repay an overdrawn balance
- You are considering writing off the loan
- The company is facing liquidation or another insolvency procedure
- You have received a repayment demand from a liquidator
The available options will depend on the company’s records, solvency, tax position and the director’s personal circumstances.
Concerned about your director’s loan account?
If your DLA is overdrawn and the company is under financial pressure, delaying action can reduce the available options. The balance may affect both the company’s tax position and your personal exposure if the business enters insolvency.
Business Helpline can help you understand the company’s position, the possible insolvency implications and the practical next steps. Contact our team for a confidential discussion.
The tax sections have been checked against current GOV.UK guidance: HMRC distinguishes between an overdrawn account and an account in credit, requires the year-end balance to appear in the annual accounts, and sets separate rules for money lent to or borrowed from the company.
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Frequently asked questions
Is a director’s loan account the same as a bank account?
No. It is usually an accounting record within the company’s books. It tracks relevant payments between the company and a director.
Can a director’s loan account have a zero balance?
Yes. If the company and director owe nothing to each other at that point, the account will have a nil balance.
Can the company repay an in-credit director’s loan?
The company can normally repay money it genuinely owes the director. However, directors should consider the company’s cash flow and solvency before taking repayment, particularly if other creditors are overdue.
Does every director need a separate loan account?
Separate records should generally be maintained for each director so the company can identify who owes money and who is owed money.
What happens if the balance is overdrawn at the year-end?
It must be shown in the company’s records and may need to be reported with the Company Tax Return. Tax consequences can depend on the amount, the director’s shareholder status and when the balance is repaid.
