Running a limited company gives you control over your business finances, but it does not mean that money in your company bank account automatically belongs to you personally. Understanding how a Director’s Loan Account works is essential for avoiding unexpected tax liabilities, accounting problems and costly mistakes.
Many company directors regularly transfer money between their personal and business accounts without fully understanding the consequences.
Sometimes these transactions are perfectly legitimate. In other cases, they can create an overdrawn Director’s Loan Account, trigger additional tax charges or cause complications when preparing annual accounts.
Here are seven common mistakes UK limited company directors should understand and avoid.
What Is a Director’s Loan Account?
A Director’s Loan Account (DLA) is an accounting record that tracks money moving between a director and their limited company, where the transactions are not treated as salary, dividends, expense reimbursements or other properly classified payments.
For example, a Director’s Loan Account may record:
- Money you borrow from your company for personal use.
- Personal money you lend to your company.
- Business expenses you pay using your own money.
- Personal expenses paid directly from the company bank account.
- Repayments of money previously borrowed.
The account can show that the company owes you money or that you owe money to the company.
When you owe more than the company owes you, your Director’s Loan Account is generally described as overdrawn.
An overdrawn account is not automatically a problem, but it must be recorded and managed correctly.
Mistake 1: Treating Company Money as Personal Money
One of the most common mistakes is assuming that, because you own the company, you can withdraw money whenever you like.
A limited company is a separate legal entity from its directors and shareholders.
This means the money held in the company bank account belongs to the company, not automatically to the individual running it.
If you transfer £2,000 from your business account to your personal account, the payment needs to be recorded correctly.
Depending on the circumstances, it might be:
- Salary processed through PAYE.
- A properly declared dividend.
- Repayment of money the company owes you.
- Reimbursement of genuine business expenses.
- A director’s loan.
If the payment does not qualify for another appropriate treatment, it may increase the amount you owe your company.
How to avoid this mistake: Always establish the correct accounting treatment before withdrawing money. Keep business and personal transactions separate wherever possible.
Mistake 2: Ignoring the Nine-Month Repayment Deadline
This mistake can become particularly expensive for directors who are also shareholders.
If an applicable director’s loan remains outstanding more than nine months after the end of the company’s Corporation Tax accounting period, the company may become liable for additional Corporation Tax under Section 455 of the Corporation Tax Act 2010.
There is an important change for 2026.
For relevant loans made on or after 6 April 2026, the Section 455 tax rate is 35.75%, compared with 33.75% for loans made between 6 April 2022 and 5 April 2026.
Example: A £20,000 Director’s Loan
Imagine a director-shareholder takes a £20,000 loan from their company in July 2026.
The company’s accounting year ends on 31 December 2026.
If the loan remains outstanding beyond the relevant nine-month repayment period, the company could face the following Section 455 charge:
£20,000 × 35.75% = £7,150
This is a significant amount of money, especially for a small business.
The Section 455 tax can generally be reclaimed after the loan has been properly repaid, released or written off, subject to the relevant rules and timing restrictions. However, the company cannot recover interest paid on the tax.
How to avoid this mistake: Review the Director’s Loan Account well before the company’s accounting year-end and plan genuine repayments in advance.
Mistake 3: Allowing Your Director’s Loan to Exceed £10,000 Without Considering Benefits in Kind
Many directors are aware of the nine-month repayment rule but overlook another important threshold.
If a director receives a cheap or interest-free employment-related loan and the total outstanding balance exceeds £10,000 at any point during the tax year, a taxable Benefit in Kind may arise.
This can create additional reporting requirements and personal Income Tax liabilities.
The company may also have Class 1A National Insurance obligations.
For example, if your company lends you £15,000 interest-free, the interest saving may be treated as a taxable employment benefit, unless a specific exemption applies.
The calculation generally uses the official rate of interest, with the relevant rate and calculation method depending on the period concerned.
How to avoid this mistake: Monitor the maximum loan balance throughout the tax year, not just the amount outstanding at year-end. Consider whether interest should be charged and whether the appropriate benefit reporting is required.
Mistake 4: Repaying a Loan and Immediately Borrowing the Money Again
Some directors believe they can avoid Section 455 tax simply by repaying a director’s loan shortly before the deadline and then withdrawing the money again.
Unfortunately, specific anti-avoidance rules are designed to prevent this practice, commonly called bed and breakfasting.
Broadly, where repayments and new loans of £5,000 or more occur within a relevant 30-day period, the rules may prevent the repayment from reducing the earlier loan for Section 455 purposes.
Additional arrangements-based rules can apply to larger amounts.
This means transferring money back into the company temporarily may not achieve the intended tax result.
How to avoid this mistake: Make genuine repayments and avoid artificial arrangements intended simply to clear the loan temporarily. Seek accounting advice before making substantial repayments or further withdrawals.
Mistake 5: Using Dividends to Clear a Loan Without Checking Available Profits
Another common approach is to clear an overdrawn Director’s Loan Account by declaring dividends.
This can be legitimate, but only when the company has sufficient distributable profits and the dividends are properly authorised and documented.
A company cannot simply declare dividends because there is money in its bank account.
Dividends must be supported by available profits after taking account of relevant accounting requirements.
For example, if a director owes their company £8,000, declaring an £8,000 dividend may clear that balance, provided the director is entitled to the dividend and the company has sufficient distributable profits.
However, the dividend may create a personal Income Tax liability.
For the 2026/27 tax year, the dividend tax rates are:
| Tax band | Dividend tax rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
The rates apply to taxable dividends within the relevant bands, after taking account of the available dividend allowance and other applicable rules.
How to avoid this mistake: Before declaring a dividend, check the company’s distributable profits, your personal tax position and the required documentation.
Mistake 6: Failing to Record Money You Personally Lend to Your Company
Director’s Loan Accounts are not only about borrowing money from your business.
They also record money you put into the company.
For example, you might:
- Transfer £5,000 from your personal savings to help the business.
- Pay a company supplier using your personal bank account.
- Purchase business equipment with your own money.
- Cover a temporary shortage in company cash flow.
Where these payments represent money genuinely lent to the company, they should be recorded appropriately.
If the company owes you money, you can generally receive repayment of the loan principal without that repayment being treated as taxable income.
However, if you charge the company interest, additional tax and reporting rules apply. The company will normally need to deduct Income Tax at the basic rate from the interest and report it through the appropriate CT61 process. The interest is also personal income that must be declared where required.
How to avoid this mistake: Keep supporting documents for money introduced into the company and ensure repayments are distinguished from salary, dividends and other payments.
Mistake 7: Waiting Until Year-End to Review Your Director’s Loan Account
Perhaps the biggest practical mistake is failing to monitor the account throughout the year.
By the time your accountant prepares the annual accounts, you may discover that:
- Your Director’s Loan Account is substantially overdrawn.
- Personal expenditure has been incorrectly recorded as business expenses.
- A beneficial loan tax charge may have arisen.
- The company faces a potential Section 455 liability.
- Dividend payments have not been properly documented.
- Important transactions are missing from the bookkeeping records.
These issues are usually easier to address when they are identified early.
Regular bookkeeping and periodic financial reviews can help prevent small errors from becoming significant problems.
How to avoid this mistake: Review your Director’s Loan Account regularly, reconcile transactions and discuss unusual withdrawals with your accountant before they create unnecessary complications.
What Happens If a Director’s Loan Is Written Off?
Some directors assume that if they cannot repay a loan, the company can simply write it off without further consequences.
Unfortunately, it is not that straightforward.
Where a company releases or writes off a director’s loan, the director may face a personal Income Tax charge, while Class 1 National Insurance contributions can also arise.
The company may be entitled to relief from an earlier Section 455 tax charge, subject to the applicable rules.
The exact treatment depends on the circumstances, including the director’s relationship with the company and how the debt is released.
Writing off a loan should therefore never be treated as a routine bookkeeping adjustment without first considering the tax implications.
How Can Limited Company Directors Avoid Director’s Loan Problems?
Good financial management does not have to be complicated.
A few straightforward habits can make a considerable difference:
- Keep personal and company finances separate.
- Record all director withdrawals and contributions accurately.
- Review the Director’s Loan Account regularly.
- Check available profits before declaring dividends.
- Monitor the £10,000 beneficial loan threshold.
- Plan ahead for the nine-month Section 455 repayment deadline.
- Avoid artificial loan repayments and re-borrowing arrangements.
- Seek professional advice before writing off a loan.
- Make sure your annual accounts and Corporation Tax returns reflect the correct balances.
Most importantly, remember that a Director’s Loan Account is not simply an accounting formality. It can have real financial and tax consequences for both the company and its directors.
How Lucas Prestige Accountants Can Help
At Lucas Prestige Accountants, we understand that running a limited company involves much more than submitting annual accounts.
Managing business finances, planning director remuneration and keeping accurate accounting records are essential parts of operating a successful company.
We provide professional accounting support to UK limited companies, including:
- Director’s Loan Account reviews and reconciliation.
- Bookkeeping and financial record management.
- Annual accounts and Corporation Tax returns.
- Salary and dividend planning.
- PAYE and payroll services.
- VAT returns and compliance.
- Self Assessment tax returns for company directors.
- Ongoing accounting advice and business support.
Whether you are concerned about an overdrawn Director’s Loan Account, planning to withdraw money from your company or simply want a clearer understanding of your financial position, our team can help.
A well-managed Director’s Loan Account can help protect your company from unexpected tax liabilities and give you greater confidence when making financial decisions.
Speak to Lucas Prestige Accountants
If you run a UK limited company and want to make sure your Director’s Loan Account is being managed correctly, contact our team today.
Lucas Prestige Accountants