Overdrawn Director Loan Account: What It Is & How to Fix It

Running a limited company in the UK offers several financial advantages. However, as a company director, it’s important to keep your finances and your business’s finances completely separate. One of the most common areas where this can become unclear is the director’s loan account (DLA). And if your DLA goes into the red, you may find yourself dealing with an overdrawn director loan account - something that can lead to tax penalties, legal complications and unnecessary stress.

In this blog, we’ll explain:

• What a director loan account is
• What it means to be overdrawn
• The tax implications involved
• And, most importantly, how to fix it

What Is a Director Loan Account? 

A director’s loan account is a record of any money that a director takes out of the company that is not:

• Salary
• Dividend
• Expense repayment
• A return of money previously loaned to the company

Instead, it's money borrowed from the company by the director or paid personally on behalf of the company that needs repaying.

If you’ve taken funds out of your company and they’re not classed as salary or dividends, then they are typically logged against your DLA. If you take more out than you put in, your DLA becomes overdrawn.

What Is an Overdrawn Director Loan Account?

An overdrawn director loan account happens when a director owes money to the company.

For example:

• If you withdraw £10,000 from the company account and it isn’t classed as salary or dividend
• And you’ve not previously put that amount into the business
• Then you now owe the company £10,000, and the account is said to be overdrawn by £10,000

This is more than just an accounting technicality. Overdrawn DLAs are monitored closely by HMRC, and if not managed correctly, they can result in significant tax charges and legal complications.

Why Is It a Problem?

1. Tax Charges (Section 455 Tax) 

If your loan remains unpaid 9 months after the end of your company’s accounting period, your company will face a Section 455 tax charge. This is currently 33.75% of the outstanding loan amount (as of 2025).

While this tax is reclaimable once the loan is repaid, it can significantly affect cash flow and ties up company funds in the meantime.

2. Benefit in Kind (BIK) 

If the loan exceeds £10,000 at any point during the tax year, and no interest is charged (or charged below HMRC’s official rate), then it may be treated as a Benefit in Kind. This means:

• The director pays personal tax through a P11D
• The company pays Class 1A National Insurance on the value of the benefit

3. Implications for Insolvency 

If your company becomes insolvent while your DLA is still overdrawn, a liquidator can pursue you personally to repay the overdrawn amount. This could result in legal action, especially if the loan is significant.

How to Fix an Overdrawn Director Loan Account

The good news? An overdrawn director loan account can be fixed. Here are your main options:

1. Repay the Loan Within 9 Months 

The simplest and most tax-efficient option is to repay the full amount of the loan within 9 months and 1 day after the end of your company's accounting period. Doing this avoids the Section 455 tax charge altogether.

Make sure the repayment is genuine - it can’t just be a temporary switch with another loan.

2. Declare a Dividend (if Profitable) 

If your company has sufficient retained profit, you can declare a dividend to cover the loan. This dividend must:

• Be supported by available profits
• Be properly documented in board minutes and dividend vouchers
• Be recorded as a payment to clear the DLA

Warning: If your company does not have enough retained profits, declaring a dividend is illegal and could cause further issues.

3. Charge Interest

If the loan is over £10,000, charging interest at HMRC’s official rate can help avoid the Benefit in Kind charge. You’ll need to:

• Include the interest as company income
• Report the interest received on your personal tax return

This method can reduce the tax burden but requires strict record-keeping.

4. Write Off the Loan (In Some Cases) 

A company may choose to write off the loan, but this isn’t a free pass. HMRC will treat the amount written off as:

• Income for the director
• Subject to Income Tax and potentially National Insurance

This should be a last resort, and you should seek advice before going down this route.

Common Mistakes to Avoid

• Temporarily repaying the loan right before the 9-month deadline, only to re-borrow it shortly after (known as ‘bed and breakfasting’) - HMRC actively monitors this
• Not keeping proper records of director loan transactions
• Treating personal spending as business expenses without justification
• Mixing personal and company bank accounts
• Forgetting to consider the impact on your cash flow when repaying a large DLA

Working with an experienced accountant will help you avoid these pitfalls and plan repayments in a tax-efficient way.

Best Practices for Managing Director Loan Accounts 

To stay compliant and financially healthy, here are a few practical steps:

• Use cloud accounting software like Xero to track all transactions in real time
• Regularly review your DLA balance with your accountant
• Avoid using company funds for personal expenses
• Keep clear board minutes and paperwork for all dividend declarations and loan repayments
• Work with a proactive accountant who reviews your accounts monthly, not just at year-end

Need Help with an Overdrawn Director Loan Account? 

At Agile Accountants, we work with limited companies across the UK - including startups, fast-growth businesses and owner-managed companies - to keep their finances compliant and efficient.

If you’re dealing with an overdrawn director loan account, we can:

• Review your accounts and tax position
• Advise you on the most tax-efficient way to repay the loan
• Help you avoid penalties and interest charges
• Set up a proper structure to prevent future issues

📞 Book Your Free Consultation Today 

Let’s get your accounts in order and your business back on track.