What is a Director's Loan?
- John Gates
- Jul 3
- 6 min read
A director’s loan is money you take from (or lend to) your limited company that is not:
Salary (through PAYE)
Dividends (from distributable profits)
Reimbursement of business expenses
Money you originally put into the company (e.g. as share capital)
Simply put, if you take money out of the company and it doesn’t fall under any of those categories, it's likely to be a director’s loan.
Can I Take a Director’s Loan?
Yes - but you must be aware of the existing rules and tax implications of taking a director’s loan.
Being a director of a limited company in the UK, it gives you the ability to take a loan from your business. Technically, funds can be used for anything. Ideally, it is used in paying for one-off or short-term expenses, such as unexpected personal bills.
On the other hand, you can also lend your company money, and the company will pay you back later. These funds are typically utilized to help with start-up costs or cash flow difficulties. It is still counted as a director’s loan, just the opposite way around.
Always remember that you (as director) and your company are separate legal entities, so the money you lend to or borrow from the company is treated as any other loan.
Looking for help managing your company finances? Speak to our team of accountants in Leamington Spa today for tailored advice.
What Is a Director’s Loan Account?
A Director’s Loan Account (DLA) is a record of all transactions between a company and its directors where funds are either borrowed from or loaned to the company. It’s essentially a running total of what’s owed either way. The balance can be in one of two positions:
In credit – the company owes you money.
Overdrawn – you owe the company money.
Every company should have this account on their books, and it is important to keep this account accurate and up to date.
As the Director, you should aim for your DLA to be in credit or at least at zero most of the time. If not, it may trigger tax implications when it’s overdrawn.
What You Need to Know When Deciding to Take a Director’s Loan
There is no legal limit on how much you can borrow as a director’s loan. However,
Consider how much you will borrow and how much the company can lend you so it may not lead to cash flow problems for the business.
Regular borrowing of money from the company might get the attention of HMRC, hence they might decide that this should be treated as a salary, and ask you to pay income tax on it.
What Are the Tax Implications of an Overdrawn Director’s Loan?
Section 455 Tax
Ideally, if your director’s loan account is overdrawn, you need to repay it before the end of the company’s financial year. HMRC also refers to your financial year end as the end of your Corporation Tax accounting period.
If your director’s loan is not repaid within 9 months of your company’s year-end, the company will owe extra Corporation Tax at 33.75% (as of 2025). This is called Section 455 tax. This rate of Corporation Tax here is the same rate as the higher rate of dividend tax, which is far from a coincidence.
Here’s the good news: once the loan is repaid, HMRC will refund the tax. But this can take a while.
Benefit in Kind (BIK) Tax
If the loan exceeds £10,000 at any point in the year and no interest is charged (or it’s below HMRC’s official rate), you may be subjected to:
Income Tax via your Self Assessment
Class 1A National Insurance payable by the company
This means that both you personally and the company will be liable to pay tax on it.
What If the Company Owes You Money?
If you’ve lent money to your company (e.g. to help it start up or to cover temporary costs), this is recorded as a credit in your DLA.
You can repay yourself at any time.
You may charge interest, which is tax-deductible for the company.
Interest received must be declared as income on your tax return.
When Directors Accidentally Create Director’s Loans
Many small business owners don’t realize they’ve created a director’s loan often because they believe they’re taking dividends when they aren’t legally allowed to. Here’s how it typically happens:
Scenario: Taking Dividends Without Retained Profits
A director checks the business bank account, sees a healthy cash balance, and takes a “dividend” of £10,000. However, the company’s accounts show:
Retained profit brought forward: £0
Profit this year: £5,000
Corporation Tax (not yet paid): £950
Distributable profit = £5,000 – £950 = £4,050
The director has taken £10,000, but only £4,050 was legally available. The excess £5,950 is not a valid dividend — it becomes a director’s loan.
If it’s not repaid within 9 months of the company’s year-end, this loan will trigger a Section 455 tax charge at 33.75%.
What Are Illegal Dividends?
Dividends can only be paid out of distributable profits. That means profit after all expenses, liabilities, and tax have been accounted for.
If you pay yourself a dividend when there aren’t sufficient retained earnings, it’s known as an illegal (or unlawful) dividend. HMRC won’t accept this as a dividend — instead, they will treat it as a loan from the company to the director.
This can be an easy mistake to make if:
You haven’t yet calculated your Corporation Tax bill
You haven't finalized year-end accounts
You’re using cash in the bank as a measure of what you can withdraw
NOTE: Cash in the bank is not the same as profit. You might have cash due to VAT collected, pending supplier payments, or unpaid Corporation Tax — all of which reduce what you can legally distribute.
Common Situations That Lead to Unintentional Director’s Loans
You draw money assuming future profits You expect your business to be profitable and take dividends in advance, but year-end accounts show a loss or lower profit.
You forget to factor in Corporation Tax You see £20,000 in the bank and take £10,000 as dividends, not realising you owe £3,800 in tax.
You delay preparing your accounts Without up-to-date management accounts, you’re flying blind — and can easily distribute more than you’re legally allowed to.
You take monthly payments as “dividends” Regular drawings that aren’t backed by formal board minutes or a dividend voucher can later be reclassified as loans if the profit isn’t there.
How to Avoid Unintended Director’s Loans
Always review retained profits before taking dividends — not just cash.
Prepare management accounts quarterly or monthly if you’re taking regular drawings.
Work with your accountant to calculate safe dividend levels.
Reimburse business expenses and record them properly so they don’t distort your DLA.
Avoid ‘dividend in anticipation’ behavior — dividends must be declared properly with board minutes and dividend vouchers.
How Can You Repay a Director’s Loan?
You have a few options when it comes to clearing the loan:
Repay it directly from your personal account;
Offset it against a declared dividend (if profits allow);or
Offset against your salary.
Just be careful not to fall into the trap of repaying the loan just to avoid tax, and then taking it out again shortly after. That’s tax avoidance and HMRC keeps a close eye on this.
Need advice on how to declare dividends or handle repayments? Our team at Duo Accountants Leamington Spa can help ensure you’re doing it correctly and tax-efficiently.
Best Practices: Keep It Simple and Compliant
Keep clear records of all transactions between you and the company.
Don’t treat the company bank account like your personal one.
Work with an accountant who understands your responsibilities.
Why Director’s Loans Matter to You
Director’s loans can be a useful tool, but mismanaging them can result in unexpected tax bills, penalties, and HMRC scrutiny.
One of the most common causes of overdrawn loans is mistakenly taking dividends when there aren’t enough retained earnings. This is easy to do if you’re basing your decisions on cash rather than profit — and it can catch even experienced business owners off guard.
Speak to an Accountant in Leamington Spa
Need personalized guidance on your director’s loan, tax planning, or end-of-year accounts?
Let’s make your company finances clearer — and your tax bills smaller.
