Director's Loan Account: How to Use It Without a Tax Charge

Taking money out of your limited company as a loan is cheaper than most directors realise — but only if you stay inside two specific thresholds. This explains both.

Illustration representing a director's loan account with pound symbols and company documents

A director's loan account is one of the most useful tools in a small limited company — and one of the most misunderstood. Used correctly, you can borrow from your own company short-term with no tax at all. Used carelessly, you can trigger a 33.75% corporation tax charge the company never earned.

What a director's loan actually is

Any money you take out of the company that is not salary, dividend or legitimate expense reimbursement is a loan. If you buy fuel for a personal car with the company card, that is a loan. If you draw £500 "to tide you over" before this month's payroll runs, that is a loan. If the company pays your personal credit card bill, that is a loan.

The accounts call this the Director's Loan Account (DLA). It starts at zero. Every unapproved withdrawal increases it; every repayment or salary/dividend transfer reduces it. If the balance is positive, the company owes you money. If it is negative (overdrawn), you owe the company.

The £10,000 benefit-in-kind threshold

If your overdrawn balance stays under £10,000 at every point during the tax year, there is no personal tax charge at all. HMRC treats it as a free short-term loan — the sort of thing a director might reasonably take while waiting for a client payment.

Once the balance exceeds £10,000 at any point, HMRC calculates a benefit in kind on the whole balance (not just the excess) at the official rate. For 2026/27 the official rate is 2.25%. On a £15,000 average balance that is £337.50 of benefit — taxed as income, so £135 of actual tax for a higher-rate taxpayer. Reportable on a P11D and includes Class 1A employer NIC for the company.

The nine-month S455 trap

This is the one that catches directors. If an overdrawn balance is still outstanding nine months and one day after the company's accounting year end, the company must pay S455 tax at 33.75% of the balance along with its Corporation Tax.

HMRC gives it back when you repay the loan — but not for another four years and a day after the end of the period in which repayment happened. So borrow £20,000, fail to repay in time, and the company writes HMRC a cheque for £6,750 it will not see again for roughly five years.

The way out: repay before the deadline. Nine months is enough time for a dividend to be declared, or for enough salary to be processed, or for the loan to be transferred to a different form (such as an overdraft facility secured on the company's assets).

What to do, in order

  1. Keep the balance under £10,000 if you can. No personal tax, no admin.
  2. If you need more, track the balance monthly, not quarterly. The P11D is reportable even on a loan that only exceeded £10,000 for a week.
  3. Set a diary reminder for eight months after your company year end. If the balance will still be overdrawn, declare a dividend or run extra salary before the nine-month mark.
  4. Never let the loan drift. The S455 charge is avoidable with planning and nearly inevitable without it.

Writing a loan off

Last-resort: the company can simply forgive the loan. In accounting terms the company takes the hit as an expense (though HMRC does not allow it as a corporation tax deduction). Worse, HMRC treats the written-off amount as dividend income to the director, taxed at your highest dividend rate — 8.75% / 33.75% / 39.35%.

Writing off a £20,000 loan for a higher-rate taxpayer costs £6,750 in dividend tax. It is almost always cheaper to repay it, even if that means pushing out a dividend from retained reserves.

Getting help with this

AJH Accountants handles limited company accounting with director tax planning for clients across the UK. We file the return, tell you what you can claim, and deal with HMRC on your behalf, so nothing depends on you remembering a deadline.

See how our limited company accounting with director tax planning service works, or send us a quotation request and we will call you back. You can also call the office on 01204 840303.

Originally published at ajhaccountant.co.uk/blog/directors-loan-account-uk-tax-guide-2026.