Overdrawn Director’s Loan Account: What You Need to Know to Avoid Tax Traps

Running a limited company gives you flexibility over how you take money from your business.

But if you dip into company funds outside of salary or dividends, you may end up with an overdrawn Director’s Loan Account (DLA) and that can lead to tax headaches.

Here’s a quick guide to what an overdrawn Director’s Loan Account is, why it matters, and how to avoid costly mistakes.

What Is an Overdrawn Director’s Loan Account?

Your Director’s Loan Account tracks money moving between you (as the director) and the company.

If you take out more than you’ve put in that is not salary or dividends, the account becomes overdrawn, meaning you owe the company money.

This often happens when:

You transfer money to yourself informally
You pay for personal items from the company account
You draw money before declaring dividends

Why Is It a Problem?

If your DLA is overdrawn at the end of your company’s financial year and not repaid within 9 months, you face:

Section 455 tax: The company must pay 33.75% of the overdrawn amount to HMRC
Benefit in Kind tax: If the loan was over £10,000 and interest-free, it counts as a benefit and must be reported
Dividend or Income Tax issues: If the loan is later written off, it may be taxed as income

These rules are in place because HMRC treats an overdrawn loan like an advance or hidden income.

How to Stay on the Right Side of HMRC

Track your Director’s Loan Account regularly: Know your balance and don’t take company money without recording it properly
Repay within 9 months: To avoid the 33.75% tax charge
Charge interest if loan exceeds £10,000: Or report it as a benefit in kind
Avoid write-offs: This could trigger extra personal tax
Talk to your bookkeeper: Early action can prevent issues at year-end