For many UK owner-managed businesses, the director’s loan account (DLA) is treated casually – a short-term solution, a temporary withdrawal, or simply “sorting cash flow later”. In reality, it’s one of the most common ways otherwise healthy businesses drift into avoidable tax problems.
This isn’t because directors are careless. It’s because director’s loans are poorly understood, rarely explained clearly, and often ignored until HMRC starts asking questions.
What Is a Director’s Loan (In Practice)?
A director’s loan occurs when:
- A director takes money from the company that isn’t salary
- Isn’t a dividend
- Isn’t a reimbursed business expense
In other words, the company has lent money to the director – and HMRC expects it to be treated like a real loan, not a casual withdrawal.
At first glance, this feels harmless. After all, it’s your business. But legally and tax-wise, the company and the director are separate.
That separation is where the risk begins.
Why Director’s Loans Become a Problem
Most director’s loan issues arise for one of three reasons:
- The Loan Is Left Outstanding Too Long
If a director’s loan isn’t repaid within 9 months and 1 day after the company’s year-end, the company can face a Section 455 tax charge – currently charged at a rate linked to dividend tax rates.
This isn’t a penalty. It’s a temporary tax paid by the company, which is only recoverable once the loan is repaid.
In practice, this creates:
- Cash flow pressure
- Unexpected tax bills
- Frustration when money is “locked” with HMRC
- The Loan Is Treated Like Income (But Isn’t Taxed Like It)
Some directors assume that withdrawing funds via a loan account avoids tax altogether.
It doesn’t.
If the loan balance exceeds £10,000 at any point in the year, it may be treated as a benefit in kind, triggering:
- Personal tax for the director
- Employer Class 1A NIC for the company
This often catches directors by surprise – especially when loans fluctuate during the year rather than sitting at a fixed balance.
- Dividends Are Used to “Clear” the Loan Incorrectly
A common fix is declaring a dividend to repay the loan. But this only works if:
- The company has sufficient distributable profits
- The dividend is properly documented
- Personal dividend tax is accounted for
Declaring dividends without profits doesn’t solve the problem – it creates another one.
Why HMRC Pays Attention to Director’s Loans
From HMRC’s perspective, director’s loan accounts are a red flag because they can indicate:
- Disguised remuneration
- Poor financial controls
- Informal withdrawals replacing proper pay structures
That doesn’t mean every DLA triggers an investigation – but persistent or poorly managed loans increase scrutiny.
What Well-Run Businesses Do Differently
Director’s loans aren’t inherently bad. Problems arise when they’re unmanaged.
Strong businesses typically:
- Monitor the DLA monthly, not annually
- Use structured salary and dividend planning
- Avoid using the company as a personal overdraft
- Clear balances before year-end where possible
- Take advice before withdrawing funds, not after
The difference is process, not complexity.
The Real Takeaway
Director’s loans feel flexible – but flexibility without structure creates risk.
Handled properly, they can support short-term cash needs. Handled casually, they quietly erode cash flow, increase tax exposure, and create stress months or years later.
If you’re unsure what your director’s loan balance is right now, that’s usually the sign it deserves attention.
