Directors’ Loan Accounts, what is it and what’s the problem?

1 Apr

Director’s Loan Account (DLA) is one of the most misunderstood tools in the shed. Used correctly, it’s a flexible way to manage your cash. Used poorly, it’s a direct line to a massive tax bill and generally just a bit of a headache for both you and your accountant.

At Lumi, we’re all about cutting the jargon. Here is the lowdown on how to navigate your DLA without getting stung.

1. The Basics: Who Owes Who?

Your DLA is essentially a running tab between you and your Limited Company, this is because you and your Limited Company are two separate entities.

In Credit: You’ve put your own money into the business. You can take this back whenever you like, tax-free. Other ways which you can end up in a credit position is when dividends are made but aren’t yet paid.
Overdrawn: You’ve taken money out that isn’t salary or dividends. You now owe the company. Other way in which Directors are commonly caught out is personal expenses put through the business. Example being; a membership for luxury cars or family holidays put through the business, these land in your directors loan account, forgotten about until the taxman comes calling…

2. The Efficiency Play: How to Win

You can use an overdrawn DLA to your advantage for short-term cash flow—like a personal interest-free overdraft.

The £10,000 Safe Zone: If you keep your loan under £10,000, you avoid "Benefit in Kind" (BIK) charges. Once you hit £10,001, HMRC expects you to pay interest at their official rate (currently, as at February 2026, 2.25%). If you don't, you’ll pay personal income tax on the "benefit" of the free loan.
The 9-Month Rule: You have 9 months and one day after your company’s year-end to clear the balance. If you clear it in time (usually by declaring a dividend), the company pays £0 in extra tax.

3. The 35.75% Tax Trap (Section 455)

This is the big one. If you miss that 9-month deadline, your company has to pay Section 455 tax on the outstanding balance.

The Current Rate: 33.75%
The April 2026 Hike: From April 2026, this rate jumps to 35.75%.

Why this matters: If you owe your company £6,000 and miss the deadline, your company has to hand over £2,145 to HMRC. You can get this money back eventually once the loan is repaid, through your corporation tax return but it’s typically a drawn out process as you need to wait until the next corporation tax return is submitted! That’s cash pulled out of your business that could have been used for growth or just normal day to day management of the business.

4. Common Pitfalls to Avoid

"Bed and Breakfasting": HMRC is onto the old trick of paying the loan back on Monday and taking it out again on Friday. If you re-borrow £5,000 or more within 30 days, they often treat it as if the loan was never repaid.
Insufficient Profits: You cannot simply "declare a dividend" to clear a DLA if the company hasn't made enough profit. If you do, the dividend is illegal, and the loan remains overdrawn.
Insolvency Risk: If your business ever struggles, an overdrawn DLA is an asset. A liquidator can come after you personally to pay that money back to cover company debts.

The Lumi Approach

Don’t wait for year-end to find out you’re in the red. We recommend reviewing your DLA quarterly. By aligning your dividends and salary with your actual spending, we ensure you stay on the right side of the 35.75% trap.

Worried your DLA is creeping up? Let’s take a look at the numbers together and build a plan.