A ‘director’s loan’ refers to the money a director takes from the company that does not count as salary, dividends, reimbursed expenses, or a repayment of funds they have personally put in. Getting the director’s loan rules wrong can lead to an unexpected Corporation Tax bill, personal tax liabilities, and National Insurance obligations that many directors do not anticipate. This guide sets out what a director’s loan is, how the Director’s Loan Account works, and what the tax rules mean in practice.
- Loans to directors over £10,000 generally need shareholder approval and must be disclosed in the company’s annual accounts, or directors risk personal liability.
- Overdrawn director’s loans unpaid nine months after year-end trigger a 33.75% Corporation Tax charge, refundable only after the loan is later cleared.
- Large or interest-free loans can create taxable benefits, and anti-avoidance rules penalise short-term repayments and reborrowing, so accurate records and forward planning are essential.
What Counts as a Director’s Loan?
A director’s loan arises whenever a company director takes money from the company outside the usual categories of remuneration: salary through PAYE, dividends drawn from profits, and reimbursed business expenses. Anything else that a director or a connected family member receives from the company falls within the director’s loan rules.
The range of transactions that end up in a Director’s Loan Account is wider than many directors expect. A company paying a director’s personal subscription, covering a household bill, or simply transferring cash to bridge a short-term gap can all become director’s loans if they are not classified as something else. The key question is whether the payment was a legitimate business expense or something paid on the director’s behalf personally. A loan can also work the other way around. When a director lends their own money to the company (perhaps to fund start-up costs) that too is recorded in the Director’s Loan Account. Some directors deliberately build a credit balance so they can later withdraw funds free of tax as a repayment of their own loan.
What Is a “Director’s Loan Account”?
Every director of a limited company should have their own Director’s Loan Account (DLA). This is a ledger recording every financial transaction between the director and the company that is not salary, dividends, or expenses. Companies with more than one director must keep a separate DLA for each.
The DLA records:
- Cash drawn from the company by the director
- Personal bills paid by the company on the director’s behalf
- Money the director has lent to the company
- Repayments the director makes to clear the balance
When the DLA shows a credit balance, the company owes the director. When it shows a debit balance, the director owes the company.
The Law Relating to Directors’ Loans
Under section 197 of the Companies Act 2006, a company cannot make a loan to a director without approval from its members. Shareholders must pass an ordinary resolution before the loan is made. A written memorandum setting out the nature, amount, and purpose of the loan must be provided before the vote.
There are exceptions. Shareholder approval is not required for loans where the total outstanding does not exceed £10,000, for credit transactions below £15,000, or for loans up to £50,000 made to cover expenditure the director incurs carrying out their legal duties. Above these thresholds, proper approval is required.
All loans above £10,000 must be disclosed in the company’s annual accounts under section 413 of the Companies Act 2006. These disclosures appear in the publicly filed accounts at Companies House. A company director who authorises a loan without proper process risks personal liability if the transaction later causes loss.
The Nine-Month Repayment Rule
If the director’s loan account is overdrawn at the company’s accounting year-end, the director has nine months and one day from that date to clear the balance. Repay within this window, and no Corporation Tax charge arises on the company.
Miss the deadline and the company must pay a charge under section 455 of the Corporation Tax Act 2010. The rate is 33.75% of the outstanding balance, for a £20,000 overdrawn DLA, which produces a £6,750 charge. The charge is refundable once the loan is repaid, but HMRC will not return the tax until nine months and one day after the end of the accounting period in which repayment is made.
A section 455 charge applies to close companies: those controlled by five or fewer participants or by any number of participators who are also directors. Most owner-managed limited companies fall within this definition. The charge and any repayment claim must be reported on the CT600A supplementary form submitted with the Company Tax Return.
| Situation | Tax outcome |
|---|---|
|
Loan repaid within 9 months and 1 day |
No s.455 charge arises |
|
Loan still outstanding after the deadline |
33.75% charge on outstanding balance |
|
Loan later repaid |
s.455 refunded 9 months and 1 day after repayment year-end |
|
Loan written off by the company |
s.455 treated as repaid; director taxed at dividend rates |
When the Director’s Loan Exceeds £10,000
A separate issue arises when the overdrawn director’s loan account exceeds £10,000 at any point during the tax year and the director is not paying interest at HMRC’s official rate. The loan is then treated as a benefit in kind. The director must report it on their Self Assessment return and the company must complete a P11D form.
The official rate for 2024/25 was 2.25%. From 6th April 2025, it increased to 3.75% for 2025/26. HMRC has confirmed it will review this rate quarterly going forward. Directors who charge interest at or above the official rate avoid a benefit in kind charge entirely. For loans at or below £10,000, no benefit in kind arises even when the loan is interest-free.
The company also pays Class 1A National Insurance on the taxable value of the benefit, calculated on the difference between the official rate and interest actually charged. For 2025/26, the Class 1A NIC rate is 15%.
What Is “Bed and Breakfasting”?
Two anti-avoidance provisions in the Corporation Tax Act 2010 target directors who repay a loan shortly before the nine-month deadline and borrow a similar amount shortly afterwards. This practice is known as ‘bed and breakfasting’. Where either rule applies, the repayment is treated as allocated against the new loan, and the original section 455 exposure remains.
It is also important to understand the 30-day-rule and the arrangements rule. These two rules are designed to stop directors from ‘gaming’ the system by repaying a loan just before a tax deadline, then immediately borrowing the same money back again.
The 30-Day Rule
Imagine you owe the company £20,000. The nine-month deadline is approaching, so you transfer £20,000 back into the company on 1st March. Three weeks later, on 22nd March, you borrow £20,000 again. HMRC looks at this and essentially says: “A repayment of £5,000 or more and a new loan of £5,000 or more both happened within 30 days of each other. We’re treating the repayment as if it never happened”. The original tax charge stays in place. The rule is triggered whenever both things happen within the same 30-day window: the repayment and the new borrowing.
The Arrangements Rule
If your loan is over £15,000 and, at the time you repay it, you already have an arrangement in place to borrow again, HMRC will ignore the repayment. It does not matter whether the new loan happens one week later or three months later. You do not need a written agreement. Even a conversation, an informal understanding, or simply using your personal bank account as a temporary waypoint before reborrowing can count.
Writing Off a Director’s Loan
A company may formally write off a director’s loan. From the company’s perspective, the write-off is treated like a repayment: any section 455 charge previously paid becomes refundable through the Corporation Tax return for the period in which the write-off occurred. The written-off amount is not deductible for Corporation Tax purposes.
For the director, the written-off amount is treated as a distribution and taxed at dividend income tax rates, currently ranging from 8.75% to 39.35% depending on total income. Class 1 National Insurance also applies on the written-off amount as earnings for NIC purposes. HMRC has recently written to directors who received loans written off between April 2019 and April 2023, where it believes amounts may not have been correctly declared.
Practical Steps for Keeping Your Director’s Loan Account in Order
Managing a director’s loan account means understanding how each transaction affects the company’s Corporation Tax position and the director’s personal tax.
- Record every transaction promptly; a DLA reconstructed at year-end is harder to defend
- Know the accounting year-end date and count forward nine months and one day: that is the repayment deadline
- If the loan will exceed £10,000, consider charging interest at the HMRC official rate to avoid a benefit in kind
- Ensure any loan above £10,000 has formal shareholder approval and a written memorandum of terms
- Avoid repaying and reborrowing within short windows; the bed and breakfasting rules may nullify the repayment
- An overdrawn DLA becomes recoverable in liquidation – the director remains personally liable regardless of internal decisions
Final Words
The director’s loan account is a routine feature of owner-managed limited companies, but the tax rules that surround it are more layered than they appear. Planning withdrawals carefully, maintaining records throughout the year, and understanding the deadlines before they pass are what separate a well-managed DLA from a costly one.
