A director loan account and dividends often become closely connected when you run your business through a limited company.
Your director’s loan account records money moving between you and the company. Sometimes the company owes you money. At other times, you may owe money back to the company.
Problems usually appear when more money leaves the business than you are actually entitled to take.
As a result, the loan account becomes overdrawn. That can create tax consequences and, in the right circumstances, a properly declared dividend may reduce or clear the balance.
In this episode, we explain how the director’s loan account works, why it becomes overdrawn, how dividends fit into the picture and what happens if the balance stays outstanding.
About this episode
Money moves backwards and forwards between directors and their companies all the time.
You might put personal money into the business when cash is tight. Alternatively, you may pay a company expense using your own card.
Later, you may take money back out.
The important question is what each movement represents.
Is the company repaying money it already owes you? Is the payment salary? Is it a valid dividend? Or have you simply borrowed money from the company?
Your director’s loan account helps answer that question.
“Imagine your director’s loan account is like a seesaw.”
What is a director’s loan account?
A director’s loan account, often shortened to DLA, is the accounting record of money owed between a director and the company.
Think of the account as having two sides.
On one side, the company owes you money.
On the other side, you owe money to the company.
As transactions take place, the balance moves backwards and forwards.
Therefore, the DLA is not a separate bank account. It is a record within the company’s accounting system showing the financial position between you and the business.
When the company owes you money
Your director’s loan account is in credit when the company owes money to you.
For example, you might personally put £5,000 into the business when it first starts trading.
Alternatively, you may pay legitimate company expenses with your own debit card, credit card or cash.
In both cases, you have effectively funded the company.
As a result, the company owes that money back to you and the amount can go onto your director’s loan account as a credit.
The accounting system can also record other legitimate amounts the company owes you.
Taking back money the company already owes you
If your loan account is in credit, you can normally withdraw money up to that balance without turning the withdrawal itself into a new loan.
Imagine the company owes you £6,000 because you previously introduced cash and paid company expenses personally.
You then transfer £4,000 from the company’s bank account to yourself.
That withdrawal reduces the balance owed to you from £6,000 to £2,000.
Therefore, you have not necessarily taken salary or a dividend. You have simply received part of the money the company already owed you.
How a director’s loan account becomes overdrawn
The position changes once you take out more money than the company owes you.
Suppose your DLA is £5,000 in credit.
You then withdraw £10,000 from the company.
The first £5,000 clears the amount the company owed you. However, the additional £5,000 leaves the account overdrawn.
At that point, you owe the company £5,000.
The extra withdrawal is not automatically a dividend simply because you are a shareholder.
Likewise, it is not automatically salary.
Instead, the accounting and tax treatment depends on what the payment actually represents and what the directors decided when you took the money.
Why overdrawn director loan accounts matter
An overdrawn director’s loan account can create tax consequences for both the company and the director.
For many small owner-managed companies, one of the main issues is Section 455 tax.
This rule can apply where a close company lends money to a shareholder, or participator, and the amount remains outstanding.
If you do not permanently clear the relevant balance within the normal period after the company’s accounting year end, the company can face an additional Corporation Tax charge.
So an overdrawn loan account should not simply be ignored until somebody prepares the next set of accounts.
Section 455 tax and the 9-month rule
If you are a director-shareholder and money remains owed to your close company at the end of its Corporation Tax accounting period, the timing becomes important.
Broadly, if you do not repay the qualifying loan within 9 months of the end of that accounting period, the company may have to pay Section 455 tax.
For relevant loans made on or after 6 April 2026, the Section 455 rate is 35.75%.
Older loans can fall under earlier rates, so the date the loan arose matters.
The company pays this tax rather than the director personally.
However, the charge exists because the director or shareholder has had use of company money without permanently dealing with that amount as salary, dividend or another form of extraction.
The episode uses older terminology when describing this charge. In current guidance, we normally refer to it as Section 455 tax.
Can the company reclaim Section 455 tax?
Section 455 does not necessarily become a permanent tax cost.
If you later genuinely repay the qualifying director’s loan, or the company formally releases or writes it off, the company may be able to claim relief under the relevant rules.
However, HMRC applies separate timing rules before the company can recover the tax.
Therefore, clearing the director’s loan later does not necessarily mean the Section 455 tax comes back immediately.
Anti-avoidance rules also exist to stop directors briefly repaying a loan and then taking substantially the same money back out again.
As a result, any repayment should be genuine rather than a temporary movement designed only to avoid the charge.
Where dividends fit into the director’s loan account
This is where dividends and the DLA become closely linked.
“Well, dividends and the loan account are inexorably linked.”
If you are both a director and a shareholder, the company may be able to declare a valid dividend to you.
Instead of transferring that dividend into your personal bank account, the company can credit the dividend to your director’s loan account.
That credit reduces the amount you owe to the company.
For example, the company could use a properly declared £5,000 dividend to clear an overdrawn DLA of £5,000.
However, the dividend needs to be legally valid before it can do that job.
A dividend cannot simply be invented afterwards
Taking money out of the company does not automatically create a dividend.
The company must have enough profits legally available for distribution.
In addition, the directors need to make the appropriate decision and complete the required company formalities.
Therefore, we should not simply reach the year end, discover an overdrawn loan account and backdate a dividend to make the problem disappear.
The timing of the dividend matters.
For a broader explanation of what dividends are and when companies can pay them, see our guide to dividends for company directors.
Dividend paperwork still matters
The company also needs evidence that it dealt with the dividend properly.
For example, the directors should record their decision and prepare the relevant dividend voucher.
That paperwork shows when the directors declared the dividend, who received it and how much the company paid or credited.
However, this page is not intended to duplicate the full documentation process.
For the detailed requirements, see Dividend Paperwork and Documentation.
A practical DLA and dividend example
Imagine your director’s loan account starts at zero.
First, you put £3,000 of your own money into the company.
Next, you personally pay £2,000 of genuine company expenses.
The company now owes you £5,000.
Later, you transfer £9,000 from the company bank account to yourself.
The first £5,000 clears the amount already owed to you. However, the remaining £4,000 leaves your DLA overdrawn.
You now owe £4,000 to the company.
Suppose the company subsequently has sufficient distributable profits and properly declares a £4,000 dividend to you.
Instead of paying that dividend into your bank account, the company credits £4,000 to the director’s loan account.
As a result, the overdrawn balance falls to zero.
Without that valid dividend, a repayment or another genuine credit, you would still owe the company £4,000.
What happens if the loan goes above £10,000?
A separate issue can arise when a director receives a cheap or interest-free loan from the company.
If the balance exceeds £10,000 at any point, you may also need to consider the beneficial-loan rules.
Depending on the circumstances and the interest paid, the loan can create a taxable benefit for the director and additional reporting or National Insurance responsibilities for the company.
Therefore, a large overdrawn DLA can potentially create more than one tax issue.
Section 455 and the beneficial-loan rules are separate considerations, so dealing with one does not automatically remove the other.
Do dividends have National Insurance?
Genuine dividends do not normally attract Class 1 National Insurance because they arise from share ownership rather than employment.
Salary works differently because it is employment income and normally goes through payroll.
However, National Insurance is only one part of the decision about how to take money from a company.
Corporation Tax, dividend tax, available profits, pension planning and the director’s wider tax position can all matter.
Our guide to limited company tax treatment explains that wider salary and dividend picture.
Why timing matters
The timing of transactions through the DLA can be critical.
Suppose you withdraw money in June but the company does not legally declare a dividend until December.
We cannot simply pretend that the June withdrawal was already a dividend if the directors had not made that decision at the time.
Instead, the account needs to reflect what actually happened at each point.
This is why accurate, contemporaneous bookkeeping matters.
It shows the DLA balance on any given date and helps us identify any tax consequences that arose during the year.
Keep the loan account updated during the year
Do not wait until your accountant prepares the accounts to discover your DLA balance.
Instead, record transactions as they happen.
That includes personal funds put into the company, business costs paid personally, repayments from the company, money withdrawn and dividends properly credited to the account.
Then review the balance regularly.
As a result, you can see whether the company owes you money or whether you owe money back to the company before the position becomes more difficult to resolve.
Common director loan account mistakes
- taking money from the company without knowing what the payment represents
- assuming every withdrawal can later become a dividend
- failing to monitor an overdrawn DLA during the year
- forgetting that the company needs sufficient distributable profits for a dividend
- backdating dividend paperwork to cover earlier withdrawals
- missing the Section 455 deadline after the company year end
- expecting repayment to produce an immediate Section 455 refund
- ignoring beneficial-loan rules on larger balances
Most of these problems become much easier to prevent when the records are current and every movement of money has a clear explanation.
FAQs
What is a director’s loan account?
A director’s loan account records money owed between a director and the company. A credit balance normally means the company owes the director, while an overdrawn balance means the director owes money back to the company.
What does an overdrawn director’s loan account mean?
It means you have taken more from the company than it currently owes you through valid credits on the loan account. The excess is normally money you owe back to the company unless another valid treatment applies.
Can I use a dividend to clear my director’s loan?
Potentially, yes. If you are a shareholder and the company has enough distributable profits, the company can properly declare a dividend and credit it to the DLA to reduce or clear the balance.
Can I backdate a dividend to clear an old withdrawal?
You should not simply backdate a dividend because the accounts later show an overdrawn DLA. The legal declaration and supporting records need to reflect when the directors actually made the dividend decision.
What is Section 455 tax?
Section 455 is a company tax charge that can apply when a close company makes a qualifying loan to a shareholder or participator and the amount remains outstanding under the relevant rules.
What is the Section 455 rate in 2026/27?
For relevant loans made on or after 6 April 2026, the Section 455 rate is 35.75%. Loans made earlier can fall under previous rates.
When does Section 455 become an issue?
If a qualifying director-shareholder loan remains outstanding after the normal period following the company’s accounting year end, the company may have to pay Section 455 tax. The common deadline to watch is 9 months after the end of the Corporation Tax accounting period.
Can Section 455 tax be reclaimed?
Potentially, yes. If you later genuinely repay the loan, or the company releases or writes it off, the company may claim relief subject to the relevant timing and anti-avoidance rules.
Does an overdrawn DLA above £10,000 create another tax issue?
It can. A cheap or interest-free loan above the relevant threshold may create a taxable beneficial-loan issue as well as the separate company tax position.
Episode Timecodes
- Dividends and the director’s loan account – 00:00
- Companies, shareholders and ownership – 00:30
- Director and shareholder roles – 00:54
- The rules this episode focuses on – 01:16
- How dividends fit into company withdrawals – 01:54
- Profits available for dividends – 02:15
- What happens without sufficient profits – 03:02
- Dividends, salary and National Insurance – 03:23
- Declaring a dividend – 04:00
- Why the paperwork matters – 04:18
- The director’s loan account seesaw – 04:40
- Money the company owes the director – 04:59
- Putting personal funds into the company – 05:17
- Paying business expenses personally – 05:34
- Taking money back out – 05:54
- How the DLA becomes overdrawn – 06:14
- Tax consequences of an outstanding balance – 06:50
- Using a dividend to clear the DLA – 07:14
- Why timing and documentation matter – 07:31
- How the DLA and dividends fit together – 08:04
Related episodes and guides
- Dividends Explained for Company Directors
- Dividend Paperwork and Documentation
- Limited Company Tax Treatment: Corporation Tax, Salary and Dividends
Key takeaway
A director loan account and dividends are connected, but they are not interchangeable.
First, the DLA tells us whether the company owes you money or whether you owe money to the company.
If you take more than the company owes you, the account can become overdrawn.
Meanwhile, Section 455 and beneficial-loan rules may create tax consequences if the balance stays outstanding or becomes large enough.
A properly declared dividend can potentially reduce or clear the balance where sufficient distributable profits exist.
However, a dividend cannot simply be invented afterwards to explain money that has already been withdrawn.
Ultimately, the safest approach is to record transactions when they happen, know what each withdrawal represents and keep an eye on the DLA throughout the year rather than waiting until the accounts are prepared.
Further Support
If you need help understanding an overdrawn director’s loan account, checking the tax consequences or deciding how to clear the balance correctly, you can contact us for an initial chat.
You can also use our free online business calculators to support your wider financial planning.
For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.
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