When you run a limited company, there are lots of financial details to keep track of. One area that often surprises directors is the director’s loan account, or DLA. Many directors only find out they have used this account when their accountant points out an overdrawn balance at the end of the year. If left unmanaged, it can lead to unexpected issues, from tax bills to personal liability, if the company becomes insolvent.

The good news is that you can manage an overdrawn DLA. It’s important to understand how it works and act before it becomes a bigger problem. At Bell & Company, we help directors with these accounts every week, often as part of wider debt or insolvency issues. If you know how these accounts work and what can put them at risk, it can be a lot simpler to get things back on track.

How Do Directors’ Loan Accounts Work?

A DLA tracks all transactions between a director and their company that aren’t salary, dividends or expense repayments. If the company lends money to the director, it records it as a debit. When the director repays it, it’s a credit. Directors often use this account to cover personal expenses during tough trading periods and plan to repay it when profits improve. Trouble starts if the amount owed grows faster than the company can repay it.

You should check the director’s loan account each year against the company’s annual accounts. If, at the end of the year, the director owes money to the company, the account is considered overdrawn. This is legal and quite common in small or family-run businesses. The tax and legal consequences depend on how much is owed and how quickly it is repaid.

When Does a Directors’ Loan Account Become Overdrawn?

Most overdrawn balances happen slowly, not from one big withdrawal. Directors might take money out during slow periods, planning to pay it back with a dividend later. If the company doesn’t make enough profit, it can’t declare that dividend, so the money stays as a loan. Paying personal expenses from the company account without recording them as salary or dividends also creates the same problem.

Sometimes directors use the account because they think more profit is available than there really is. Just because the bank balance looks good doesn’t mean there is profit to pay out as dividends. Using that money for dividends when it’s not allowed can lead to illegal dividends and more problems on top of the first loan.

The Tax Consequences of an Overdrawn Balance

Section 455 Tax on an Overdrawn Director’s Loan

If a director or shareholder owes money to their company and the relevant loan remains outstanding nine months and one day after the end of the company’s Corporation Tax accounting period, the company may have to pay a tax charge under Section 455 of the Corporation Tax Act 2010.

For relevant loans made on or after 6 April 2022, the Section 455 tax rate is currently 33.75% of the outstanding loan.

Section 455 is intended as a temporary tax charge. If the loan is subsequently repaid, released or written off, the company may be able to claim relief. However, that relief is not immediately available: it generally becomes due nine months and one day after the end of the accounting period in which the repayment, release or write-off occurs.

For a company already experiencing cash-flow pressure, an additional Section 455 liability can therefore make an existing Overdrawn Director’s Loan Account significantly more problematic.

Benefit in Kind and National Insurance

An interest-free or low-interest Director’s Loan can also create a taxable benefit in kind.

Where the beneficial-loan rules apply and the loan exceeds the relevant exemption, the director may be taxed on the benefit of receiving the loan at less than HMRC’s official rate of interest.

As of September 2026, HMRC’s official rate is 3.75%, although this rate can now be reviewed during the tax year. The company may also be liable for Class 1A National Insurance, currently 15% for 2026/27, on the taxable value of the benefit.

Can You Repay a Director’s Loan and Take It Back Out Again?

Directors should also be aware of HMRC’s “bed and breakfasting” anti-avoidance rules.

These rules are designed to prevent a Director’s Loan from being temporarily repaid simply to avoid a Section 455 charge before substantially the same funds are withdrawn again.

Specific rules can apply where repayments and subsequent borrowing occur within a 30-day period, as well as in certain arrangements involving larger loan balances.

The tax treatment of a Director’s Loan Account can depend on when money was withdrawn, when it was repaid, the balance involved and how the transactions were structured. Directors should therefore obtain appropriate tax advice before making repayments or further withdrawals purely for tax purposes.

Read more about Director’s Loan Accounts and insolvency risk here. 

How to Manage or Clear an Overdrawn Directors’ Loan Account

Repay the Balance Directly

If the company has enough cash, paying back the DLA in full is the simplest solution. You can do this in one payment or in agreed instalments, as long as you meet the deadline. Keep clear records of each repayment, as HMRC and any insolvency practitioner will want to see them.

Declare a Dividend

If the company has real distributable profits, it can declare a dividend and use it to clear the DLA on paper. This only works if the profit is genuine and all the paperwork, like board minutes and dividend vouchers, is done correctly. Be aware that declaring a dividend the company can’t support creates more risk than it solves.

Pay a Bonus or Additional Salary

Paying a bonus or extra salary can also clear the DLA. However, this option comes with its own income tax and National Insurance costs for both the director and the company. It works well for directors who want certainty instead of relying on dividends. It’s a good idea to check the real after-tax cost before choosing this option.

A company can write off the DLA, but this is rarely as tax-efficient as it might seem. HMRC treats a written-off loan as a dividend or sometimes as employment income, and taxes the director on it. Writing off a loan just before insolvency can also be challenged, so this option needs careful timing and proper advice.

When Negotiation Is the Better Option

If the company is already insolvent or the balance is too large to clear using the other options, negotiating with creditors or a liquidator is often the most practical solution. We often help directors reach a commercial settlement with a liquidator, based on what they can actually afford, not just the amount shown on paper.

This is where our experience as debt strategists really helps. 

We helped a director settle a £360,000 overdrawn loan for £15,000 by working directly with the liquidator, rather than going through a costly dispute. Liquidators usually look beyond the balance sheet and base their offers on what a director could realistically pay. A strong, well-documented case makes a lower settlement possible.

Get Expert Help With Your ODLA

An overdrawn DLA doesn’t have to become a crisis. By knowing the tax deadlines, keeping good records and dealing with the balance before insolvency becomes a risk, you can stay in control. If you can’t clear the balance using the usual methods, negotiating a settlement with creditors or the liquidator is often the best next step.

At Bell & Company, we’ve helped thousands of directors manage overdrawn loan accounts and negotiate affordable settlements. Get in touch today for a confidential initial case review to learn what your options are.