Director’s Loan Accounts: Avoid the Tax Traps (A Practical Guide for Oxfordshire SMEs)

When cash is tight (or you’re moving quickly), it’s easy for a Director’s Loan Account (DLA) to drift out of balance. But an overdrawn DLA can trigger avoidable tax charges and penalties. This guide explains what to watch for — and how business owners can stay on the right side of HMRC.

What is a Director’s Loan Account?

Your DLA records money that flows between you (as a director/shareholder) and your company outside of salary, dividends, or reimbursed expenses.

• Debit (you owe the company): the company has paid personal costs, or you’ve drawn funds not declared as salary/dividend.
• Credit (company owes you): you’ve paid business costs personally or put cash into the company.

Why overdrawn DLAs are risky

If the DLA is overdrawn at the year end and still outstanding 9 months and 1 day after the year end, the company may face a temporary corporation tax charge (s455) on the outstanding balance. You’ll get it back later — but only when the loan is fully repaid — which can hurt cash flow.

If the loan to you exceeds HMRC’s beneficial loan threshold, the director may be taxed on a benefit-in-kind and the company may owe Class 1A NIC on that benefit.

TL;DR: Overdrawn = cash tied up + possible extra tax. Keep it clean and planned.

Common ways DLAs go wrong (and quick fixes)

Personal costs through the company card

Fix: Move to a clear expense policy + monthly expense claims. Use apps (Receipt Bank / Dext, Hubdoc) so personal items don’t slip in.

Drawing “ad hoc” cash instead of dividends/salary

Fix: Pay a regular salary within thresholds and declare dividends from distributable reserves with proper minutes.

Repaying the loan then re-borrowing

Fix: HMRC has anti-avoidance rules (often called the “bed & breakfasting” rules). If you repay then take a similar loan again within a short period, relief can be denied. Plan genuine repayments, not circular movements.

Not reviewing the DLA until year-end

Fix: Add the DLA to your monthly close checklist. If it’s overdrawn, agree a plan: declare a dividend (if profits/reserves allow), repay from personal funds, or adjust salary (with PAYE implications).

Smart ways to keep your DLA healthy

• Agree a personal drawings plan (mix of salary/dividends) for the year.
• Minute all dividends and check there are sufficient distributable reserves.
• Reimburse business expenses monthly, don’t leave claims to pile up.
• Log director top-ups as “capital introduced” when you fund the business personally.
• Review the DLA monthly alongside bank recs and aged debtors/creditors.

Example: a quick tidy-up

A Bicester consultancy discovers a £18,000 overdrawn DLA at year-end. Within 3 months, we:

Regularised drawings (modest salary + quarterly dividends supported by profits).

Reimbursed outstanding business expenses (moving DLA towards credit).

Cleared the balance before the 9-month deadline, avoiding the temporary s455 charge.

Introduced a monthly “DLA checkpoint” in the close process.

Result: clean DLA, better cash planning, and no HMRC surprises.

How Modus helps

• Set the right mix of salary/dividend for your goals and tax position.
• Implement monthly close routines so DLA issues are caught early.
• Prepare board minutes for dividends and maintain tidy documentation.
• Advise on efficient repayment methods and timing to avoid charges.
• Integrate with Xero/QuickBooks/FreeAgent so the DLA is always up to date.

FAQs — Director’s Loan Accounts

Can I just clear the DLA with a dividend?
Yes — if you have sufficient distributable reserves and the company is solvent. We’ll check the numbers and minute the dividend properly.

Is interest required on the loan?
It depends. If the company loans to a director, benefit-in-kind rules can apply above HMRC thresholds. We’ll advise the simplest compliant route.

What if my DLA is already overdrawn?
Don’t panic. We’ll map out options (dividend, repayment, salary) and a timeline to minimise or recover charges.

Next steps

If your drawings are ad hoc or your DLA is creeping up, let’s fix it now — before year-end. Get in touch and book your free 30-minute discovery call.

📞 01993 225030 | 📧 hello@modus-accountants.co.uk