It’s common for directors of small limited companies to take money out of the business through a director’s loan account (DLA), especially when drawing funds ahead of dividends or during tight cash flow periods. But if this account becomes overdrawn, there are tax consequences that both the company and the director need to be aware of.
What Is an Overdrawn Director’s Loan Account?
A director’s loan account records the money a director owes to or is owed by the company. If you take more out of the company than you’ve put in, and it hasn’t been repaid within a set timeframe, you’ll end up with an overdrawn balance.
This isn’t illegal, but HMRC keeps a close eye on these transactions. If not handled properly, it can lead to unwanted tax bills for both the business and the director personally.
Tax Implications for the Company
If the loan is not repaid within 9 months and 1 day of the company’s year-end, the company must pay an additional tax charge known as Section 455 tax, at a rate of 33.75% on the outstanding loan amount. This tax is refundable, but only once the director repays the loan.
It’s essentially a way for HMRC to discourage the long-term use of company funds for personal benefit.
Also, if the loan is later written off rather than repaid, the company may need to treat it as a form of salary or dividend, triggering further tax and National Insurance implications.
Tax Implications for the Director
If the loan exceeds £10,000 at any point in the year, it’s classed as a benefit in kind. This means:
- The company must report it on a P11D.
- The director must pay income tax on the notional interest they should have paid.
- The company also pays Class 1A National Insurance on the value of that benefit.
If the loan is later written off, the amount may be taxed as a dividend or salary, depending on the circumstances—and that could increase the director’s personal tax bill.
How to Avoid Trouble
Keep the balance under £10,000 to avoid benefit-in-kind treatment. Repay within 9 months after the company year-end to sidestep the 33.75% S455 tax. If you’re unsure, speak to your accountant before drawing funds to ensure it’s done tax-efficiently.
Summary
✅ Loans under £10k = no benefit in kind
✅ Loans repaid within 9 months = no S455 tax
✅ Loans written off = possible income tax + NI
✅ Accurate record-keeping = essential
Would you like help managing your director’s loan account?
At Greystone Advisory, we can help you stay compliant and tax-efficient while giving you clarity and control over how you take money from your business. Contact us today or visit www.greystoneadvisory.co.uk to get started.
