Running a limited company as a sole director gives you flexibility and control over your finances, but it also brings responsibilities.
One area that often confuses small company owners is the Director’s Loan Account (DLA).
You may have heard the term thrown around, especially if you’ve taken money out of your business or paid for company expenses from your own pocket.
In this post, we’ll explain what a Director’s Loan Account is, how it works, and why it’s important to keep it accurate.
We’ll also look at how to avoid unexpected tax bills and use the account in a way that keeps both you and HMRC happy.
What Is a Director’s Loan Account (DLA)?
A Director’s Loan Account is a virtual ledger that tracks money owed between you (as the director) and your limited company.
- If you lend money to the company, this is a credit to your DLA. This means the company owes you money.
- If you take money out of the company that isn’t salary, dividend, or an expense reimbursement, that’s a debit on your DLA. This means you owe the company money.
The balance can go in either direction, but it’s crucial to track it properly.
Think of the DLA as a running tab of personal vs company money.
Why Does a Director’s Loan Account Exist?
Unlike sole traders, limited companies are separate legal entities from the Director.
That means your company’s money isn’t your money until it’s been officially paid out (as salary or dividends).
The DLA exists to account for those in-between situations:
- You put personal funds into the business to help with cash flow
- You pay for business expenses personally
- You take money from the business for personal use, outside of payroll or dividends
These movements must be recorded accurately to avoid breaching tax rules.
At Legacy Figures Accountancy, we focus on your finances so you can focus on your business.
Want to learn more? Let’s have a chat.
Common Uses of a Director’s Loan Account
Here are the most frequent ways a DLA comes into play:
| Scenario | What Happens | DLA Position |
|---|---|---|
| You pay for business expenses personally | Company owes you money | Credit (positive balance) |
| You transfer company funds to your personal account (outside of salary/dividends) | You owe the company | Debit (overdrawn) |
| You loan the company money to help with cash flow | Company owes you | Credit (loan repayable to you) |
Tax Implications: When Things Get Complicated
1. Overdrawn Loan Accounts
If your DLA ends the financial year in a debit position (you owe the company money), this may trigger additional tax:
- Section 455 tax: If not repaid within 9 months of your company’s year-end, the company pays 33.75% tax on the overdrawn balance.
- This tax is refundable, but only once the loan is repaid.
2. Benefit in Kind
If you borrow over £10,000 from the company at any point in the year and don’t pay interest, HMRC considers this a benefit in kind.
You may:
- Owe personal tax on the benefit
- Have to report it on a P11D
- Require the company to pay Class 1A National Insurance
3. Writing Off the Loan
If the company writes off the loan (decides not to reclaim it), HMRC treats this as income.
It’s taxed like a dividend and must be reported.
Best Practices for Managing Your DLA
- Keep detailed records: Log every loan, repayment, or expense reimbursement with supporting evidence
- Use accounting software: Track your DLA alongside your other accounts for clarity
- Avoid accidental overdrawn balances: Check your DLA before transferring company money to yourself
- Plan repayments: Aim to repay any overdrawn balance within 9 months of your company year-end
- Stay under the £10,000 threshold if borrowing temporarily to avoid benefit in kind rules
How We Help
At Legacy Figures Accountancy, we help directors understand and manage their Director’s Loan Accounts properly.
Our services include:
- Monthly bookkeeping to track DLAs accurately
- Quarterly reviews to flag potential issues early
- Year-end support to ensure overdrawn accounts are addressed before deadlines
- CT600 filing that properly accounts for DLA-related taxes
We explain everything in plain English and make sure your DLA doesn’t become a hidden tax trap.
