A Director’s Loan Account (DLA) is a common financial arrangement for many UK company directors, but it can also be a tax trap if not managed correctly. Understanding how director’s loans work, the HMRC rules, and the potential tax implications is crucial to avoid costly mistakes.

Whether you’re a new company director or reviewing your current accounts, this comprehensive guide will walk you through the rules, responsibilities, and best practices for managing a Director’s Loan Account in the UK.

🔍 What Is a Director’s Loan Account?

A Director’s Loan Account tracks money withdrawn from or paid into the business by a director, outside of salary, dividends, or expense reimbursements.

For example:

• If a director lends money to the company = credit balance
• If a director borrows money from the company = debit balance

This account is usually maintained by the company’s accountant and shown in the balance sheet.

📋 Key Rules and Regulations

1. ✅ Borrowing From the Company (Overdrawn DLA)

When a director takes more money out of the company than they’ve put in, the account is considered overdrawn. This is treated by HMRC as a loan and must follow strict rules:

• Repayment Deadline: Must be repaid within 9 months of the company’s year-end to avoid extra tax.
• Tax Charge (Section 455 Tax):
  • If not repaid in time, the company pays 32.5% tax on the overdrawn amount.
  • This tax is refundable when the loan is repaid.

2. 💸 Interest on the Loan

If the loan is over £10,000, and no interest is charged, it can be considered a benefit in kind, and:

• The company must report it on a P11D.
• The director may have to pay personal tax.
• The company may owe Class 1A National Insurance.

To avoid this, the company can charge HMRC’s official interest rate, currently 2.25% (subject to change).

🧾 Tax Implications of Directors’ Loans

Situation	Tax Consequence
Loan repaid within 9 months	No Section 455 tax
Loan not repaid	Treated as a benefit in kind
Loan > £10,000 interest-free	Treated as benefit in kind
Multiple loans with repayments	HMRC may apply “bed and breakfasting” rules

⚠️ Bed and Breakfasting Rule

Repaying a loan just before the deadline and re-borrowing soon after can trigger anti-avoidance rules. HMRC may disallow the repayment unless at least 30 days pass between transactions.

🗓️ Recording and Reporting to HMRC

• DLA must be shown in the company’s annual accounts.
• Directors should disclose loans in their Self Assessment tax returns, especially if they are interest-free or not repaid on time.
• Loans written off are treated as dividends or earnings, depending on the case.

🏛️ Legal and Compliance Risks

Failing to comply with HMRC rules can lead to:

• Penalties
• Interest on unpaid tax
• Investigations by HMRC
• Disqualification as a company director (in extreme cases)

💼 Best Practices for Managing a Director’s Loan Account

1. Maintain Clear Records
   Keep detailed, real-time records of all transactions.
2. Avoid Large, Long-Term Loans
   Try to repay loans within the 9-month deadline.
3. Consult an Accountant
   An experienced accountant can help you avoid tax pitfalls.
4. Charge Official Interest Rate
   If the loan exceeds £10,000, consider charging HMRC’s official rate.
5. Plan Repayments Strategically
   Time your repayments to stay within HMRC’s regulations and avoid the 32.5% tax.

🤝 How Mohi & Co Can Help

At Mohi & Co, we specialize in helping UK business owners stay compliant with HMRC’s evolving rules. We offer tailored advice on:

• Director’s Loan Account setup and management
• Tax-efficient withdrawals
• Avoiding Section 455 tax
• Benefit-in-kind calculations

📞 Contact us today for a free consultation and protect your business from costly tax surprises.

Conclusion

A Director’s Loan Account can be a valuable financial tool, but it’s also surrounded by strict HMRC regulations. Make sure to understand the rules, plan carefully, and consult professionals when needed. This not only avoids tax penalties but also ensures smoother financial operations for your company.