The Director's Loan Account Explained for Trade Business Owners (2026)

What Is a Director's Loan Account?

A director's loan account is a running record of money that passes between you (as a director) and your limited company, outside of the three "normal" routes: salary through PAYE, dividends, and repayment of business expenses you paid for personally. A company is a separate legal person from you — its money is not your money, even if you own 100% of the shares. The DLA is simply the ledger that tracks who owes whom.

Money flows out of the company and onto your DLA whenever you: take a cash drawing because the bank balance looked healthy; pay a personal bill from the business account; use the company card for the weekly shop; or pull money to cover a tax bill before you've formally voted a dividend. Money flows in (reducing what you owe) when you: pay personal cash into the company; let the company owe you for tools or materials you bought; or formally clear the balance with a dividend or bonus.

In Credit vs Overdrawn — The Crucial Difference

The single most important thing to understand is which direction the DLA is pointing.

• In credit: the company owes you. This happens when you've put your own money in — covering a van deposit, buying materials on your personal card, or working without taking a full salary in the early months. You can draw this money back out tax-free at any time, because it's your money being returned. No tax charge applies.
• Overdrawn: you owe the company. This is where the tax problems live. If you take more out than you put in (and more than your salary, dividends and expense repayments cover), your DLA goes overdrawn — and HMRC treats it as a loan from the company to you.

An overdrawn DLA is not illegal and is extremely common in trade businesses, particularly where cash is taken through the year and dividends are only declared at the year end. But it must be managed deliberately, because two separate tax charges can bite.

The s455 Tax Charge — 33.75% on an Unpaid Overdrawn DLA

This is the big one, and it catches a lot of trade business owners off guard. Section 455 of the Corporation Tax Act 2010 imposes a charge on the company when a director's loan is still outstanding nine months and one day after the company's accounting year end (the same date your corporation tax is due).

The s455 rate for 2026 is 33.75% — deliberately set to match the higher-rate dividend tax rate, so you can't use a loan to dodge the tax you'd pay on a dividend. So if your DLA is £20,000 overdrawn at the year end and you haven't cleared it within nine months and one day, the company must pay £6,750 in s455 tax (£20,000 × 33.75%).

The good news: s455 is a temporary charge, not a permanent cost. Once you repay the loan, HMRC refunds the s455 tax — but the timing is painful. The refund is claimed via form L2P and is only repayable nine months and one day after the end of the accounting period in which the loan was repaid. In practice that can mean HMRC holds your money for well over a year. Treat s455 as an interest-free loan to HMRC that you eventually get back, not as money you've lost — but plan the cash flow, because £6,750 tied up for 18 months hurts a small trade business.

The "Bed and Breakfasting" Anti-Avoidance Rules

The obvious trick is to repay the loan a day before the nine-month deadline to avoid s455, then borrow the same money straight back. HMRC closed this down years ago with two anti-avoidance rules, informally called "bed and breakfasting":

• The 30-day rule: if £5,000 or more is repaid and then a similar amount (£5,000+) is withdrawn again within 30 days, the repayment is matched against the new withdrawal and effectively ignored — so the s455 charge still applies to the original loan.
• The "arrangements" rule: even outside the 30-day window, if the balance was £15,000 or more and at the time of repayment there was an intention or arrangement to redraw the money, the repayment is ignored. This stops directors waiting 31 days to sidestep the first rule.

The practical takeaway: don't play games with the year-end balance. If you genuinely can't repay, accept the s455 charge and reclaim it later. A repayment that is really just a round-trip will be unwound by HMRC, and you'll have the worst of both worlds.

Benefit-in-Kind on Loans Over £10,000

The s455 charge is a corporation tax issue. There is a separate personal tax issue: the benefit-in-kind (BIK) on a cheap or interest-free loan. If your overdrawn DLA exceeds £10,000 at any point in the tax year, the company is treated as having given you a taxable perk — because in the real world you could not borrow that money interest-free from a bank.

HMRC charges tax on the difference between the interest you actually paid the company and interest calculated at the official rate. The official rate of interest is set by HMRC and for 2026 sits at 3.75%. So an interest-free overdrawn DLA of £25,000 across the full year produces a beneficial loan benefit of around £937.50 (£25,000 × 3.75%). That figure goes on a form P11D, you pay income tax on it at your marginal rate, and the company pays Class 1A National Insurance (13.8% for 2026) on top — roughly £129 of employer NIC in this example.

Two ways to avoid the BIK: keep the overdrawn balance below £10,000 all year, or have the company charge you interest at or above the official rate (the interest the company receives is itself taxable, but it removes the BIK and the P11D admin). Many trade business owners simply aim to stay under the £10,000 line.

Quick Reference: Key DLA Thresholds and Charges (2026)

How to Repay an Overdrawn Director's Loan

There are three legitimate ways to clear an overdrawn DLA, and most trade businesses use a combination.

1. Declare a dividend

The most common route. If the company has sufficient retained, post-tax profit, you can vote a dividend and use it to clear the loan with a bookkeeping entry — no cash needs to leave the bank. The dividend is taxable on you personally (8.75% basic rate, 33.75% higher rate, 39.35% additional rate for 2026, after the £500 dividend allowance), so factor that in. Critically, you can only pay a dividend out of profit — paying one when the company is loss-making or insolvent is unlawful.

2. Pay a salary or bonus

You can vote yourself a bonus and offset it against the loan. This works even when there are no distributable profits, but it runs through PAYE — so income tax and both employee and employer National Insurance apply, which usually makes it more expensive than a dividend for a profitable company.

3. Repay in cash

The simplest option: pay personal money back into the company account. Useful when the company has no spare profit to declare a dividend, or when you want to clear the balance before the nine-month deadline and sort out the dividend paperwork later. Just remember the bed-and-breakfasting rules if you intend to draw it straight back out.

Record Keeping — Don't Wing It

HMRC expects a clear, contemporaneous record of the DLA. For a trade business this means:

• Keep business and personal spending separate. Mixing the weekly shop and a van service on the company card is the single biggest cause of a messy overdrawn DLA.
• Record every drawing and repayment with a date and amount — your accounting software's director's loan ledger should reconcile to the penny.
• Document dividends properly: a board minute and a dividend voucher for each one, dated, even if you're the only director.
• Track the running balance through the year, not just at the year end, so you spot the £10,000 BIK line and the nine-month deadline before they become a problem.
• Keep the loan account as a named account in your bookkeeping, separate from the bank account, so you can always answer the question: in credit or overdrawn, and by how much?

The Real Risk: an Overdrawn DLA if the Company Fails

This is the part that owners underestimate. An overdrawn director's loan account is an asset of the company — a debt you owe it. If the company becomes insolvent and goes into liquidation, the liquidator's job is to recover money for creditors, and an overdrawn DLA is one of the first things they pursue. They will demand that you repay the balance personally, in full.

That £20,000 you took as "my money from my company" through a hard year can become a £20,000 personal demand from a liquidator, on top of any personal guarantees you've signed for finance or leases. Continuing to draw down when you know the company can't pay its debts can also expose you to wrongful trading and misfeasance claims. If your trade business is struggling, get the DLA under control early and take advice before it spirals — an overdrawn loan is a personal liability waiting to happen, not free money.

Frequently Asked Questions

Can I take money out of my limited company whenever I want?

You can move money out, but it has to be categorised correctly — salary, dividend, expense repayment, or a director's loan. Anything that isn't one of the first three lands on your DLA as a loan, with the s455 and BIK consequences described above.

How much can I borrow before there's a tax charge?

Up to £10,000 overdrawn avoids the benefit-in-kind charge. Any overdrawn amount, even under £10,000, can still trigger the 33.75% s455 charge if it isn't repaid within nine months and one day of the year end.

Do I get the s455 tax back?

Yes. Once the loan is repaid, the company reclaims the s455 charge using form L2P. The refund is only payable nine months and one day after the end of the accounting period in which you repaid, so expect HMRC to hold it for a considerable time.

What's the safest way to use my DLA?

Keep it in credit or close to zero, take regular small dividends from genuine profit instead of large ad-hoc cash drawings, never let the overdrawn balance cross £10,000, and clear any overdrawn amount well before the nine-month deadline. When in doubt, speak to your accountant before the year end, not after.