The Director’s Loan Account (DLA) is a common feature in the accounts of owner-managed businesses, but it is also one of the most scrutinised. While it offers financial flexibility, an overdrawn DLA presents significant tax risks for both the company and the director. This guide breaks down the core tax implications, the consequences of writing off a loan, and the essential compliance points you must consider when advising your clients.
What is the Director’s Loan Account?
The DLA is not a physical bank account. It is an accounting record, a ledger within the company’s books that tracks all money moving between a director and their company that is not salary, a dividend, or an expense reimbursement.
The law requires directors to keep a record of any money they borrow from or pay into their company. The DLA serves this purpose, recording:
- Cash withdrawals made by the director.
- Personal expenses of the director are paid for with company money.
If the director has loaned money to the company, the DLA will be in credit. If the director has borrowed money from the company, the DLA will be overdrawn (a debit balance). It is this overdrawn status that triggers specific and often punitive tax rules.
The Section 455 Tax Charge on Overdrawn DLAs
The primary tax risk associated with an overdrawn DLA stems from section 455 of the Corporation Tax Act 2010 (CTA 2010). This rule applies when a close company makes a loan or advance to a “participator” (which includes most director-shareholders) or their associates.
| s.455 Tax Charge: Key Elements | Details |
|---|---|
| The Trigger | A loan or advance is made to a participant and remains outstanding. |
| The Due Date | The tax is due 9 months and 1 day after the end of the accounting period in which the loan was made. |
| The Tax Rate | The rate matches the dividend upper rate for the tax year in which the loan or advance is made. It is 35.75% for loans made in 2026/27, increased from 33.75% for 2025/26. |
| Who Pays? | The company is liable to pay the tax, as if it were Corporation Tax. |
This is a temporary tax. The company can reclaim it from HMRC, but only once the underlying loan has been repaid, released, or written off.
Reclaiming the s.455 Tax: Repayment, Release, or Write-Off
Section 458 of CTA 2010 provides the mechanism for relief from the s.455 charge. Relief is given if the loan is repaid, released, or written off. The company can reclaim the s.455 tax, but the relief is only effective from the date the repayment or write-off occurs, with the tax itself repayable 9 months after the end of the accounting period in which the loan was cleared.
However, the method used to clear the loan has vastly different tax consequences.
1. Repayment of the Loan
If the director repays the loan, the company can reclaim the s.455 tax paid. This action generally has no further income tax implications for the director. However, you must be aware of anti-avoidance rules. HMRC challenges arrangements where a loan is repaid shortly before the s.455 due date only to be redrawn shortly after, or where balances are moved between group companies without genuine repayment to the original lender.
2. Release or Write-Off of the Loan
A “release” is a formal legal act, whereas a “write-off” is an accounting action that may not be final. From a tax perspective, they have the same effect, triggering a “mirror” charge on the director.
-
For the Company:
- The company can reclaim any s.455 tax paid under s.458 CTA 2010.
- Crucially, the company is denied a corporation tax deduction for the impairment loss. Under the loan relationship rules, no debit can be brought into account for the release of a loan that gave rise to a s.455 charge.
-
For the Director (Participator):
- The director is treated as having received a dividend.
- Under section 415 of the Income Tax (Trading and Other Income) Act 2005, the gross amount of the debt written off is charged to income tax at the dividend rates.
The question of whether a loan has actually been written off can be contentious, particularly in insolvency. A liquidator choosing not to pursue a debt does not automatically constitute a write-off if they reserve the right to do so in future. HMRC may argue that a loan has been de facto written off if it is clear there is no intention to pursue repayment.
Other Critical Compliance Considerations
Companies Act 2006: Requirement for Approval
Under s.197 of the Companies Act 2006, a company cannot make a loan to a director without first obtaining approval via a resolution of its members (shareholders). Failure to do so makes the transaction voidable at the instance of the company. The director who received the loan, and any other directors who authorised it, can be held personally liable to account for any gains and indemnify the company for any loss.
Benefit in Kind (BIK) Tax
If a director’s loan exceeds a statutory limit (currently £15,000 for certain directors/employees) and is provided interest-free or at a rate below HMRC’s official rate, a taxable benefit in kind arises. The director will be liable to pay income tax on the cash equivalent of the benefit.
Record Keeping and HMRC Scrutiny
HMRC frequently examines Director’s Loan Accounts during compliance checks. If records are poor or funds have been taken without being properly recorded, HMRC will treat any misappropriated funds as loans or advances, rewriting the DLA and calculating s.455 liability accordingly. Separate loan, credit, or remuneration accounts mustn’t be simply “netted off” for s.455 purposes unless there is clear factual evidence that they are operated as a single, amalgamated account.
For further practical guidance, you should refer to HMRC’s Company Taxation Manual, particularly the section on close company loans to participators at CTM61500 onwards, and the Enquiry Manual at EM8510.
Join 5,000+ businesses comparing today