What is a Director's Loan & How Do They Work?

“It’s my company — I can take money out whenever I want, right?”

That’s what a client said to me over coffee one Tuesday morning. He smiled like he was joking. But he wasn’t. And I could tell this misunderstanding had already cost him money. Possibly a lot of it.

If you’re a director of your own limited company, the director’s loan account (DLA) might seem like a magic pot of gold you can dip into whenever you need. Cash flow's tight? Take a loan. Need a deposit on a new car? Loan. Want to treat yourself to a family holiday? Well... you see where this is going.

But here’s the truth: director’s loans are useful tools — but only if you understand the rules. Get it wrong, and HMRC won’t just frown. They’ll tax you. Sometimes heavily.

So let’s clear this up in plain English. No fluff. Just the facts, plus a few stories from the trenches.

What is a director’s loan?

A director’s loan is when you take money from your company that isn’t salary, dividends, or an expense reimbursement.

Let’s say your company is called Brilliant Widgets Ltd. You’re the only director and shareholder. Your business bank account has £10,000 in it. You’ve already paid yourself a small salary and haven’t declared any dividends. But the boiler just exploded at home, and you need cash — fast.

So, you transfer £2,000 from the company account to your personal one.

That, my friend, is a director’s loan.

It’s not income. It’s not a gift. It’s money you owe the company.

I had a client once who used his company account like his personal ATM. Every time he took money, he’d say, “I’ll sort it out later.” We ended up having to explain it all to HMRC in a meeting room that felt colder than a walk-in freezer. Let’s avoid that for you.

How is it different from salary?

Simple: a salary is taxed via PAYE. You earn it. HMRC gets their cut right away. A director’s loan? That’s a temporary borrowing. It’s not taxed as income unless you cross certain lines.

And those lines? They’re not hard to cross.

So what counts as a director’s loan?

More than people think. If the company pays for your personal shopping, settles your home gas bill, or even lends your cousin £500 — yep, that could be classed as a director’s loan.

The rule of thumb is this: if the company pays for something that isn’t a business cost and doesn’t go through payroll or dividends, it’s a loan.

Can anyone take one?

Only directors or “participators” (basically shareholders in small companies). So, sole traders — this isn’t for you. You and your business are legally the same entity. No separate “company pot” to borrow from.

When does it become taxable?

Ah. Now we’re talking real consequences.

If you don’t repay the loan within 9 months of your company’s year-end, the company has to pay something called Section 455 tax. That’s 33.75% of the outstanding amount.

Let’s say you borrowed £10,000 in July, and your company year-end is December. You’ve got until the end of the following September to pay it back. Miss that deadline? HMRC wants £3,375.

And no, that’s not a fine. It’s tax. The company can reclaim it eventually, but only after you repay the loan.

What if I pay part of it back?

Good question. If you repay £6,000 and leave £4,000 outstanding, only the £4,000 gets hit with tax. That’s £1,350.

But be careful of "bed and breakfasting" — where you repay just before the deadline and then borrow it all again a few days later. HMRC’s wise to that trick. They want to see genuine repayments.

Can I offset it with a dividend?

Yes, in theory. If your company has enough profit and you properly declare a dividend, you can use it to clear the loan. But make sure it’s documented. I once reviewed a company’s books where they’d scribbled “dividend to cancel loan” on a Post-it note. Not exactly HMRC-proof.

Can I repay it in instalments?

Absolutely. As long as the full amount is repaid by the 9-month deadline, you’re golden. Just keep a record and don’t leave it to the last minute.

What happens if I don’t repay it?

You pay the tax. And if the loan is over £10,000 and you don’t pay interest to the company (at HMRC’s official rate), you also get taxed personally for receiving a benefit — just like if someone gave you a free company car.

And yes, that means a P11D form, Class 1A NICs, the whole shebang.

What if the company closes down?

Tricky. If the company enters liquidation, you still owe the money. A liquidator can chase you for it. And if the books show you took out cash and didn’t repay it? You may have to repay from your own personal funds — even if the company’s dead.

Can I use a director’s loan to buy a house?

Technically, yes. But should you? Probably not. Big loans raise big red flags. HMRC doesn’t love it. And your accountant (hello 👋) will definitely ask a few pointed questions.

How should I record it?

Use a proper director’s loan account in your bookkeeping software. Every time you take money, it goes in. Every time you repay or offset it, that’s recorded too.

Get it wrong, and your year-end accounts will look like spaghetti.

Final thoughts

Director’s loans aren’t evil. They’re just misunderstood. Used well, they give you flexibility. Used badly, they give you tax bills.

So, if you’re ever unsure — ask. A 15-minute chat with your accountant is cheaper than a letter from HMRC.

If you’ve got questions about your director’s loan account, we’d be happy to walk you through it. No judgment. Just straight answers.

Need help managing your director’s loan account properly?

Reach out to Zeus Accountants — we’ve helped dozens of directors get back in control of their finances (without the HMRC headache).

Let’s keep your money working for you — not against you.

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