Director's Loan Accounts for Trade Businesses — How They Work and the Tax Traps (2026)

What Is a Director's Loan Account?

A director's loan account (DLA) is simply a running record of money flowing between you personally and your limited company that doesn't fall into one of the three "clean" categories: salary processed through PAYE, a properly declared dividend, or a genuine reimbursement of a business expense. Anything else you put in or take out gets tracked here.

Your company is a separate legal entity. Its money is not your money, even if you own 100% of the shares. The DLA is the mechanism that keeps the two sets of pockets straight. When you pay for company materials out of your own bank account, you've effectively lent the company money — that goes in your favour. When you take cash out without it being wages or a dividend, you've borrowed from the company — that goes against you. The balance at any point is the net of all those movements.

The Two States: In Credit vs Overdrawn

At any given time, your director's loan account is in one of two states, and the difference matters enormously for tax.

In Credit — the Company Owes You

When you've put more in than you've taken out, the account is in credit. This is common in the early days. You bought a van fit-out, a load of materials, your tools or your first batch of stock on a personal card, or you lent the company start-up money to get it off the ground. The company owes you that money back.

The good news: you can draw a credit balance back out tax-free. It isn't income — it's the repayment of a loan you made. No income tax, no National Insurance, no dividend tax. If your DLA shows the company owes you £6,000 because you funded the early kit, you can take that £6,000 back whenever the cash allows, with no tax consequence at all. Many new trade directors leave money in the company unnecessarily simply because they don't realise this.

Overdrawn — You Owe the Company

When you've taken more out than you've put in (and more than your salary and dividends cover), the account is overdrawn. You now personally owe the company money. This is where the tax traps live, and it's the state most directors accidentally end up in.

Why Trade Directors End Up Overdrawn

The classic route into an overdrawn DLA looks like this. You draw cash from the company throughout the year to live on — a regular "wage" in your head, even though it isn't being run through payroll. You assume that at the year end your accountant will tidy it up by declaring a dividend to cover what you've taken. For most years, that works.

The problem comes in a lean year. A dividend can only legally be paid out of distributable profits — the accumulated post-tax reserves shown in the company accounts. If the company didn't make enough profit, or a big bad debt or a slow winter wiped out the reserves, there's simply no profit to declare a dividend against. The drawings you took all year now have nowhere to land except the director's loan account, and you're overdrawn. Declaring a dividend with insufficient reserves is unlawful and HMRC can reclassify it, so "just pay a dividend anyway" is not a safe fix.

The Section 455 Tax Charge — the Big One

This is the trap that produces unexpected bills. If your DLA is still overdrawn 9 months and 1 day after the end of your company's accounting period, the company has to pay a tax charge under section 455 of the Corporation Tax Act 2010 (s455) on the outstanding balance.

The s455 rate is set to track the higher dividend tax rate — currently 33.75% of the amount still owed at that point. So if you owe the company £20,000 and haven't repaid it by the deadline, the company faces a s455 charge of around £6,750. Rates do change, so always confirm the current s455 percentage for your year end with your accountant or on GOV.UK before you rely on a figure.

The crucial detail people miss: s455 is a temporary charge. It's refundable. Once you repay the overdrawn loan, HMRC refunds the s455 tax — but the refund only comes 9 months and 1 day after the end of the accounting period in which you repaid it. In other words, the money is locked up with HMRC for a long time. It's not a penalty you lose forever, but it's a serious cash-flow hit, and on a tight-margin trade business that lump sum being unavailable can hurt as much as a genuine cost.

• Trigger: DLA overdrawn 9 months + 1 day after the company year end
• Charge: 33.75% of the outstanding balance (check the current rate)
• Refundable: yes, once repaid — but the refund is slow to arrive

The 9-Month Repayment Window

The 9-month-and-1-day deadline is the same date your corporation tax is due, which makes it easy to remember. The lesson is simple: if you're overdrawn at the year end, you have a window to clear the balance before s455 bites. Plan for it. Don't wait for your accounts to be finalised months later and discover the charge has already crystallised. Knowing your rough DLA position before the year end gives you time to act — which is exactly why keeping your bookkeeping current matters so much.

Benefit-in-Kind on Cheap or Interest-Free Loans

s455 isn't the only tax consequence of an overdrawn DLA. There's a second, separate trap: benefit-in-kind (BIK).

If your overdrawn director's loan exceeds £10,000 at any point in the tax year and you're paying no interest, or interest below HMRC's official rate, the difference is treated as a taxable benefit. In effect, getting a cheap loan from your own company is treated like a perk, the same way a company car would be.

The consequences: the company must report the benefit on a P11D, the company pays Class 1A National Insurance on the value of the benefit, and you personally pay income tax on it through your tax code or self assessment. You can avoid the BIK entirely by charging yourself interest at or above HMRC's official rate and actually paying it to the company — though that interest then becomes taxable income for the company. For loans that stay under £10,000 across the whole year, the BIK rules generally don't apply, which is one reason directors try to keep balances below that threshold.

"Bed and Breakfasting" — Don't Try to Game It

The obvious dodge is to repay the loan just before the 9-month deadline to dodge s455, then borrow the same money straight back a few days later. HMRC saw this coming. The anti-avoidance rules — often called the "bed and breakfasting" rules — catch exactly this behaviour.

Broadly, if £5,000 or more is repaid and then £5,000 or more is re-borrowed within a short window (the rules look at repayments and redraws within 30 days, and a separate "intentions and arrangements" test for larger sums regardless of timing), the repayment is effectively ignored for s455 purposes. The charge still applies as if you never repaid. So a genuine repayment that sticks is fine; a circular repay-and-redraw to dodge the charge is not. Don't structure your year end around it — it doesn't work and it draws attention.

How to Clear an Overdrawn DLA

There are three legitimate ways to clear an overdrawn director's loan, each with its own tax consequences. Often the best answer is a combination, decided with your accountant.

• Repay cash. The cleanest option. Pay the money back into the company bank account from your personal funds. No tax, no charge, balance cleared. The catch is you need the cash personally to do it.
• Vote a dividend (if reserves allow). If the company has sufficient distributable profits, declare a dividend and use it to clear the loan. You'll pay dividend tax personally (8.75% basic, 33.75% higher, 39.35% additional rate in 2026 — confirm current bands), but it avoids s455 because the loan is repaid. This only works if the reserves genuinely exist.
• Take it as bonus salary. Run an extra amount through payroll as a bonus to clear the balance. This attracts income tax and both employee and employer National Insurance, so it's usually the most expensive route — but it works even when there are no reserves to pay a dividend.

One more point: if the company formally writes off or releases a director's loan rather than you repaying it, the written-off amount is treated as income in your hands (taxed broadly like a dividend) and there can be NIC consequences too. A write-off is not a free way out.

Record-Keeping — Why Accurate Figures Matter

Everything above depends on your accountant having an accurate, up-to-date picture of what's gone in and out. If personal transactions are mixed into the business account with no record of which were drawings, which were expense reimbursements, and which were you funding the company, reconstructing the DLA at year end becomes guesswork — and guesswork around a 33.75% charge is exactly where directors lose money.

Keep business and personal money separate wherever you can. Log every personal-card purchase of materials so it credits your DLA, and flag every cash draw so it's clearly a loan and not an untracked expense. Keeping clean, current financial records in something like Trade2Base means you can see your rough loan position well before the year end, instead of finding out about a s455 charge when it's too late to do anything about it. Good records also make the conversation with your accountant faster and cheaper.

Trade2Base won't file your corporation tax return, but by keeping your income, expenses and drawings tidy as you go, it gives your accountant the accurate figures they need to manage the DLA properly and warn you before a charge crystallises.

Quick Reference: Director's Loan Account Tax Traps 2026

Tax rates and thresholds change. This is general guidance, not advice for your specific situation — confirm current figures with your accountant or on GOV.UK before acting.