Director's loan accounts: a plain-English guide for Bromley company directors

If you run a small limited company in Bromley, Chislehurst or Orpington, there's a good chance you have a director's loan account, even if you have never heard the phrase. It's one of the most common areas where we find problems when a new client moves to us, and it's usually easy to fix once you understand it.

This guide explains what a director's loan account is, why an overdrawn one can cost you tax, and the simple habits that keep it under control.

What is a director's loan account?

A limited company is a separate legal person from you. Its money belongs to the company, not to you, even if you own all the shares. A director's loan account (often called a DLA) is simply the record of money moving between you and the company that isn't salary, dividends or a properly claimed expense.

It works in both directions:

• The company owes you if you've put your own money in, for example to cover start-up costs or pay a supplier from your personal card. The account is "in credit", and you can usually take that money back tax-free.
• You owe the company if you've taken money out that isn't salary, dividends or a business expense. The account is "overdrawn", and that's where tax issues start.

How accounts become overdrawn without anyone noticing

In our experience, very few directors deliberately borrow from their company. The account usually slips into the red through everyday habits, such as:

• transferring "drawings" to a personal account each month without declaring a dividend;
• paying personal bills, shopping or family costs from the business account;
• taking dividends when the company doesn't have enough retained profit to pay them lawfully, which may mean they are treated as a loan instead.

With cloud software such as Xero or QuickBooks connected to your bank feed, these items show up quickly, but only if someone is reviewing them during the year rather than at year end.

The tax consequences of an overdrawn account

The section 455 charge. If you still owe the company money nine months and one day after the end of its accounting period, the company has to pay a temporary tax charge on the outstanding balance under section 455 of the Corporation Tax Act 2010. The rate is linked to the higher rate of dividend tax: it is 35.75% for loans made on or after 6 April 2026, and 33.75% for loans made between 6 April 2022 and 5 April 2026. The tax is repayable once the loan is repaid or written off, but HMRC only refunds it some time after the end of the accounting period in which the repayment happens, so the money can be tied up for a long time.

Benefit in kind. If the loan goes over £10,000 at any point in the tax year and you pay less interest than HMRC's official rate, it is normally treated as a taxable benefit. That means a P11D for you and Class 1A National Insurance for the company.

Writing the loan off. If the company writes off the loan, you will usually be taxed on the amount as if it were a dividend, and there can be National Insurance implications too. Write-offs need careful handling and proper paperwork.

Bed and breakfasting rules. Repaying a loan just before the deadline and then taking the money straight back out does not work. Anti-avoidance rules can ignore repayments that are re-borrowed within 30 days, or where there is an arrangement to re-borrow.

Ways to clear an overdrawn account

There are several legitimate options, and the right one depends on your company's profits and your personal tax position:

• Repay in cash from personal funds before the nine-month deadline.
• Declare a dividend, if the company has enough distributable profit, and credit it to your loan account. This is personal income for you, so it needs to be planned alongside your other income for the tax year.
• Pay a bonus or extra salary through payroll, which carries income tax and National Insurance but may suit some situations.
• Use a credit balance where you have previously lent money to the company.

The timing matters. Dividend tax rates rose in April 2026, and although the Autumn Budget on 28 October 2026 left dividend tax rates unchanged, it's worth reviewing your plans with your accountant rather than relying on what worked in earlier years.

Good habits that prevent problems

1. Keep business and personal spending separate. A dedicated business bank account and card makes a real difference.
2. Pay yourself through proper routes: a planned salary through payroll and dividends backed by minutes and vouchers.
3. Review your loan account quarterly, not just at year end. Your bookkeeping software can show the running balance at any time.
4. Record money you put in. If you pay for something personally on the company's behalf, keep the receipt so it can be credited to you.
5. Talk to us before year end so there is time to choose the most tax-efficient way to clear any balance.

How Muftals Accountancy can help

We are a chartered (ACCA and CIMA) practice based in Chislehurst, working with directors of small limited companies across Bromley, Orpington, Swanley and the wider BR, SE London and NW Kent area. We prepare year-end accounts and Corporation Tax returns, run director payroll, keep your bookkeeping up to date in Xero, QuickBooks, FreeAgent or Sage, and flag director's loan account issues while there is still time to deal with them.

Not sure where your loan account stands? Book a free first call on 020 7078 7546 (Monday to Friday, 9am to 5:30pm) or get in touch online.