A director loan account is not automatically a problem. Trouble usually starts when drawings build up without a clear plan for clearing them, or when the balance is only looked at after the year end.
Snapshot Summary
Director loan accounts usually become expensive when nobody deals with them early. If you know the balance, understand the trigger points and agree how it will be cleared, most problems can be managed before they turn into tax issues.
If you borrow from your company, know the balance, review it monthly and decide early how it will be cleared. Once it is overdrawn, it can create a benefit in kind issue for you and, in some cases, a section 455 charge for the company.
What a director loan account is
A director loan account records money moving between you and the company that is not salary, dividend, or a reimbursed business expense. If you take out more than you are entitled to, the account becomes overdrawn and the tax position changes.
Letting the balance drift over £10,000If the total outstanding balance on beneficial loans goes over £10,000 at any point in the tax year, the loan can become a taxable benefit. That can result in extra income tax for the director and Class 1A National Insurance for the company.
What to do:
Set a monthly review point and an internal ceiling. Do not leave this until the accounts are being prepared.
Ignoring the official rateIf the company charges no interest, or not enough interest, the shortfall can create a taxable benefit. HMRC’s official rate is 3.75% from 6 April 2026.
What to do:
If the account is overdrawn, check the current official rate and whether interest needs to be charged. Do not assume last year’s approach still works.
Forgetting the company’s section 455 riskIf a loan to a participator is still outstanding nine months and one day after the end of the accounting period, the company can face a section 455 charge. For loans made or benefits conferred on or after 6 April 2026, the rate is 35.75%.
What to do:Do not wait for the year end accounts to tell you there is a problem. Put the section 455 date in the diary early and deal with the balance in time.
Clearing it briefly, then drawing it againA short-term repayment does not always solve the problem. HMRC has anti-avoidance rules aimed at balances that are repaid and then drawn again soon afterwards.
What to do:Make sure any repayment is part of a real clearance plan, not just a temporary move to get past a deadline.
Treating paperwork as optionalDirector loan accounts are often left too informal. If HMRC ever reviews the position, weak records can make a bad situation harder to defend.
What to do:Make sure personal spending is posted correctly as it happens. DLA problems often get worse because the coding is cleaned up too late.
Assuming a write-off is a simple fixWriting off a director loan is not a tidy admin shortcut. It can create tax consequences for the director and National Insurance consequences for the company.
What to do:Take advice before treating a write-off as the answer. It can solve one issue while creating another.
How can Oldfield help you?
If you already have an overdrawn DLA, or want a clearer plan for drawings in 2026, we can help you review the balance, understand the tax exposure and decide the best route forward.
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Please note: This article is for general information purposes only and was correct as at the time of writing (16/04/26) and does not constitute financial advice. Tax rules and legislation are subject to change, and their application depends on your individual circumstances. We recommend seeking advice from a suitably qualified tax adviser. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
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