A director loan account and dividends often become closely connected when you run your business through a limited company.

Your director's loan account records money moving between you and the company. Sometimes the company owes you money. At other times, you may owe money back to the company.

Problems usually appear when more money leaves the business than you are actually entitled to take.

As a result, the loan account becomes overdrawn. That can create tax consequences and, in the right circumstances, a properly declared dividend may reduce or clear the balance.

In this episode, we explain how the director's loan account works, why it becomes overdrawn, how dividends fit into the picture and what happens if the balance stays outstanding.

About this episode

Money moves backwards and forwards between directors and their companies all the time.

You might put personal money into the business when cash is tight. Alternatively, you may pay a company expense using your own card.

Later, you may take money back out.

The important question is what each movement represents.

Is the company repaying money it already owes you? Is the payment salary? Is it a valid dividend? Or have you simply borrowed money from the company?

Your director's loan account helps answer that question.

“Imagine your director's loan account is like a seesaw.”

What is a director's loan account?

A director's loan account, often shortened to DLA, is the accounting record of money owed between a director and the company.

Think of the account as having two sides.

On one side, the company owes you money.

On the other side, you owe money to the company.

As transactions take place, the balance moves backwards and forwards.

Therefore, the DLA is not a separate bank account. It is a record within the company's accounting system showing the financial position between you and the business.

When the company owes you money

Your director's loan account is in credit when the company owes money to you.

For example, you might personally put £5,000 into the business when it first starts trading.

Alternatively, you may pay legitimate company expenses with your own debit card, credit card or cash.

In both cases, you have effectively funded the company.

As a result, the company owes that money back to you and the amount can go onto your director's loan account as a credit.

The accounting system can also record other legitimate amounts the company owes you.

Taking back money the company already owes you

If your loan account is in credit, you can normally withdraw money up to that balance without turning the withdrawal itself into a new loan.

Imagine the company owes you £6,000 because you previously introduced cash and paid company expenses personally.

You then transfer £4,000 from the company's bank account to yourself.

That withdrawal reduces the balance owed to you from £6,000 to £2,000.

Therefore, you have not necessarily taken salary or a dividend. You have simply received part of the money the company already owed you.

How a director's loan account becomes overdrawn

The position changes once you take out more money than the company owes you.

Suppose your DLA is £5,000 in credit.

You then withdraw £10,000 from the company.

The first £5,000 clears the amount the company owed you. However, the additional £5,000 leaves the account overdrawn.

At that point, you owe the company £5,000.

The extra withdrawal is not automatically a dividend simply because you are a shareholder.

Likewise, it is not automatically salary.

Instead, the accounting and tax treatment depends on what the payment actually represents and what the directors decided when you took the money.

Why overdrawn director loan accounts matter

An overdrawn director's loan account can create tax consequences for both the company and the director.

For many small owner-managed companies, one of the main issues is Section 455 tax.

This rule can apply where a close company lends money to a shareholder, or participator, and the amount remains outstanding.

If you do not permanently clear the relevant balance within the normal period after the company's accounting year end, the company can face an additional Corporation Tax charge.

So an overdrawn loan account should not simply be ignored until somebody prepares the next set of accounts.

Section 455 tax and the 9-month rule

If you are a director-shareholder and money remains owed to your close company at the end of its Corporation Tax accounting period, the timing becomes important.

Broadly, if you do not repay the qualifying loan within 9 months of the end of that accounting period, the company may have to pay Section 455 tax.

For relevant loans made on or after 6 April 2026, the Section 455 rate is 35.75%.

Older loans can fall under earlier rates, so the date the loan arose matters.

The company pays this tax rather than the director personally.

However, the charge exists because the director or shareholder has had use of company money without permanently dealing with that amount as salary, dividend or another form of extraction.

The episode uses older terminology when describing this charge. In current guidance, we normally refer to it as Section 455 tax.

Can the company reclaim Section 455 tax?

Section 455 does not necessarily become a permanent tax cost.

If you later genuinely repay the qualifying director's loan, or the company formally releases or writes it off, the company may be able to claim relief under the relevant rules.

However, HMRC applies separate timing rules before the company can recover the tax.

Therefore, clearing the director's loan later does not necessarily mean the Section 455 tax comes back immediately.

Anti-avoidance rules also exist to stop directors briefly repaying a loan and then taking substantially the same money back out again.

As a result, any repayment should be genuine rather than a temporary movement designed only to avoid the charge.

Where dividends fit into the director's loan account

This is where dividends and the DLA become closely linked.

“Well, dividends and the loan account are inexorably linked.”

If you are both a director and a shareholder, the company may be able to declare a valid dividend to you.

Instead of transferring that dividend into your personal bank account, the company can credit the dividend to your director's loan account.

That credit reduces the amount you owe to the company.

For example, the company could use a properly declared £5,000 dividend to clear an overdrawn DLA of £5,000.

However, the dividend needs to be legally valid before it can do that job.

A dividend cannot simply be invented afterwards

Taking money out of the company does not automatically create a dividend.

The company must have enough profits legally available for distribution.

In addition, the directors need to make the appropriate decision and complete the required company formalities.

Therefore, we should not simply reach the year end, discover an overdrawn loan account and backdate a dividend to make the problem disappear.

The timing of the dividend matters.

For a broader explanation of what dividends are and when companies can pay them, see our guide to dividends for company directors.

Dividend paperwork still matters

The company also needs evidence that it dealt with the dividend properly.

For example, the directors should record their decision and prepare the relevant dividend voucher.

That paperwork shows when the directors declared the dividend, who received it and how much the company paid or credited.

However, this page is not intended to duplicate the full documentation process.

For the detailed requirements, see Dividend Paperwork and Documentation.

A practical DLA and dividend example

Imagine your director's loan account starts at zero.

First, you put £3,000 of your own money into the company.

Next, you personally pay £2,000 of genuine company expenses.

The company now owes you £5,000.

Later, you transfer £9,000 from the company bank account to yourself.

The first £5,000 clears the amount already owed to you. However, the remaining £4,000 leaves your DLA overdrawn.

You now owe £4,000 to the company.

Suppose the company subsequently has sufficient distributable profits and properly declares a £4,000 dividend to you.

Instead of paying that dividend into your bank account, the company credits £4,000 to the director's loan account.

As a result, the overdrawn balance falls to zero.

Without that valid dividend, a repayment or another genuine credit, you would still owe the company £4,000.

What happens if the loan goes above £10,000?

A separate issue can arise when a director receives a cheap or interest-free loan from the company.

If the balance exceeds £10,000 at any point, you may also need to consider the beneficial-loan rules.

Depending on the circumstances and the interest paid, the loan can create a taxable benefit for the director and additional reporting or National Insurance responsibilities for the company.

Therefore, a large overdrawn DLA can potentially create more than one tax issue.

Section 455 and the beneficial-loan rules are separate considerations, so dealing with one does not automatically remove the other.

Do dividends have National Insurance?

Genuine dividends do not normally attract Class 1 National Insurance because they arise from share ownership rather than employment.

Salary works differently because it is employment income and normally goes through payroll.

However, National Insurance is only one part of the decision about how to take money from a company.

Corporation Tax, dividend tax, available profits, pension planning and the director's wider tax position can all matter.

Our guide to limited company tax treatment explains that wider salary and dividend picture.

Why timing matters

The timing of transactions through the DLA can be critical.

Suppose you withdraw money in June but the company does not legally declare a dividend until December.

We cannot simply pretend that the June withdrawal was already a dividend if the directors had not made that decision at the time.

Instead, the account needs to reflect what actually happened at each point.

This is why accurate, contemporaneous bookkeeping matters.

It shows the DLA balance on any given date and helps us identify any tax consequences that arose during the year.

Keep the loan account updated during the year

Do not wait until your accountant prepares the accounts to discover your DLA balance.

Instead, record transactions as they happen.

That includes personal funds put into the company, business costs paid personally, repayments from the company, money withdrawn and dividends properly credited to the account.

Then review the balance regularly.

As a result, you can see whether the company owes you money or whether you owe money back to the company before the position becomes more difficult to resolve.

Common director loan account mistakes

• taking money from the company without knowing what the payment represents
• assuming every withdrawal can later become a dividend
• failing to monitor an overdrawn DLA during the year
• forgetting that the company needs sufficient distributable profits for a dividend
• backdating dividend paperwork to cover earlier withdrawals
• missing the Section 455 deadline after the company year end
• expecting repayment to produce an immediate Section 455 refund
• ignoring beneficial-loan rules on larger balances

Most of these problems become much easier to prevent when the records are current and every movement of money has a clear explanation.

FAQs

What is a director's loan account?

A director's loan account records money owed between a director and the company. A credit balance normally means the company owes the director, while an overdrawn balance means the director owes money back to the company.

What does an overdrawn director's loan account mean?

It means you have taken more from the company than it currently owes you through valid credits on the loan account. The excess is normally money you owe back to the company unless another valid treatment applies.

Can I use a dividend to clear my director's loan?

Potentially, yes. If you are a shareholder and the company has enough distributable profits, the company can properly declare a dividend and credit it to the DLA to reduce or clear the balance.

Can I backdate a dividend to clear an old withdrawal?

You should not simply backdate a dividend because the accounts later show an overdrawn DLA. The legal declaration and supporting records need to reflect when the directors actually made the dividend decision.

What is Section 455 tax?

Section 455 is a company tax charge that can apply when a close company makes a qualifying loan to a shareholder or participator and the amount remains outstanding under the relevant rules.

What is the Section 455 rate in 2026/27?

For relevant loans made on or after 6 April 2026, the Section 455 rate is 35.75%. Loans made earlier can fall under previous rates.

When does Section 455 become an issue?

If a qualifying director-shareholder loan remains outstanding after the normal period following the company's accounting year end, the company may have to pay Section 455 tax. The common deadline to watch is 9 months after the end of the Corporation Tax accounting period.

Can Section 455 tax be reclaimed?

Potentially, yes. If you later genuinely repay the loan, or the company releases or writes it off, the company may claim relief subject to the relevant timing and anti-avoidance rules.

Does an overdrawn DLA above £10,000 create another tax issue?

It can. A cheap or interest-free loan above the relevant threshold may create a taxable beneficial-loan issue as well as the separate company tax position.

Episode Timecodes

• Dividends and the director's loan account - 00:00
• Companies, shareholders and ownership - 00:30
• Director and shareholder roles - 00:54
• The rules this episode focuses on - 01:16
• How dividends fit into company withdrawals - 01:54
• Profits available for dividends - 02:15
• What happens without sufficient profits - 03:02
• Dividends, salary and National Insurance - 03:23
• Declaring a dividend - 04:00
• Why the paperwork matters - 04:18
• The director's loan account seesaw - 04:40
• Money the company owes the director - 04:59
• Putting personal funds into the company - 05:17
• Paying business expenses personally - 05:34
• Taking money back out - 05:54
• How the DLA becomes overdrawn - 06:14
• Tax consequences of an outstanding balance - 06:50
• Using a dividend to clear the DLA - 07:14
• Why timing and documentation matter - 07:31
• How the DLA and dividends fit together - 08:04

Related episodes and guides

• Dividends Explained for Company Directors
• Dividend Paperwork and Documentation
• Limited Company Tax Treatment: Corporation Tax, Salary and Dividends

Key takeaway

A director loan account and dividends are connected, but they are not interchangeable.

First, the DLA tells us whether the company owes you money or whether you owe money to the company.

If you take more than the company owes you, the account can become overdrawn.

Meanwhile, Section 455 and beneficial-loan rules may create tax consequences if the balance stays outstanding or becomes large enough.

A properly declared dividend can potentially reduce or clear the balance where sufficient distributable profits exist.

However, a dividend cannot simply be invented afterwards to explain money that has already been withdrawn.

Ultimately, the safest approach is to record transactions when they happen, know what each withdrawal represents and keep an eye on the DLA throughout the year rather than waiting until the accounts are prepared.

Further Support

If you need help understanding an overdrawn director's loan account, checking the tax consequences or deciding how to clear the balance correctly, you can contact us for an initial chat.

You can also use our free online business calculators to support your wider financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Many people would have come across the term dividends, heard it taught by other people, by commentators. They may have had that term mentioned by their accountants if they're in business. Well, in today's podcast, I'm going to be looking particularly at dividends with specific reference as to what they actually are, how you can legally pay them to yourself,

and thirdly, we're going to mention something called the director's loan account, or DLA for sake of abbreviation.

A few things just to emphasise and clarify before we progress with this podcast is number one, if you have a company, so it will normally have the letters LTD at the end of it, or limited in full, that's a company, not sole trader. So if you have a company and you happen to own that company in part or in full, so you have what are called shares of that company, then you are classified as a shareholder.

If you happen to also be the person that runs that company, taking the day-to-day decisions, then you are also the company director. The idea of dividends is only applicable to those people who are shareholders in companies. For most small businesses, the people who represent the shareholders, the investors, if you wish, also happen to be the company directors.

Now, dividends are normally touted and talked about as a tax-efficient way, question mark, to take money and extract it out of your business. Now, this podcast is not going to be focusing on tax numbers, tax rules, when it's advantageous, and all the rest of it. That's for another podcast. It's been dealt with historically, but we're going to come back and revisit that later on.

But it's looking at the rules, the responsibilities, what you should do, what you shouldn't do, what dividends are in general terms, and how you go about making those dividends, and not to forget the wonderful DLA. Not to be confused with DVLA, which is something completely different, and it's to do with driving and cars.

Now dividends, firstly, are payments made by a company to its shareholders. Typically, it's a financial transfer out of the company into an individual's bank account. It can be made at one point in time. It can be declared as it's called and made in the future. But dividends are only payable to shareholders, and it is a very popular way to extract funds from the business.

Now there are some critical things to understand here. Firstly, there's a legal role. And dividends can only be paid from your company's post-tax profits. So if you imagine you're running a company, that company is a creative agency, and it's invoicing clients for work it's carrying out. It deducts its ongoing expenses, typically like advertising, software, fees to the accountant, let's not forget them.

It then has a profit that it's made, and then it's got to pay tax on that figure. It's the money left over after paying all the running costs of the business, the expenses, if you want, and the corporation tax, whatever's left over is called post-tax profits. Now, it's critical that your company has got post-tax profits built up, either for that year in question to constitute what are called reserves.

If you don't have positive reserves, by the way, it's illegal to make a dividend payment. You won't go to prison, by the way, but there will be potentially a financial consequence. Also worth noting, dividends are not considered to be business costs. So they're neither your salary, which will be dealt with under what's called PAYE, and they're neither expenses, business expenses from the company.

So if you pay yourself a dividend of, say 5 000, that does not reduce the profit that will be subject to corporation tax. Dividends are not classed as wages, they are considered, if you're on a posh term, appropriations of profit. What that means also, is there's no national insurance contributions payable on those dividend payments.

That potentially attracts some tax efficiency, but obviously the downside is that you're not going to get tax relief from those dividends, so that could also be a downside. Lastly, dividends, even though a lot of people may not necessarily follow this formality, have to be formally declared by the company directors, not the shareholders.

It's to the directors that make that decision. So if you happen to be the shareholder and sole director of your company, technically speaking, you're wearing two hats. Hat number one is the director of that company that makes that decision of how much of the profits remaining in the company are to be paid out as dividends, either now or at some point in the future.

And also there's the requisite paperwork you must complete as well. Now let's talk about the director's loan account. Now, in your capacity as a director of your company or one of the directors of the company, it’s likely that during the course of time, money will be transferred out of that company into your own personal account, and it's likely that money will be put into the company by yourself as well.

Now, imagine your director's loan account is like a seesaw. On one side of the seesaw is where the company, considered to be a separate legal entity from you, owes money to you. So typically, if you're running a payroll, you're paying yourself under PAYE, which stands for Pay As You Earn. Each month that goes by, you'll be entitled to a net salary.

Let's say for argument's sake that it's worked out that for you it's advantageous to set a salary which gives you a take-home pay of a thousand pounds per month. That's what the company owes to you. That's effectively your take-home pay, and that will mean your director's loan account is in credit because that's money the company owes to you.

If you've also had to put funds into the company at any point, maybe because you're running short of cash, maybe you're just getting the company started, or maybe there's funding that needs to be provided by yourself. When you put money into the company, the company owes it to you, that also counts as a credit on your loan account.

If you pay for things like travel expenses, items purchased on behalf of the business, and you're using your own personal debit card, or your own personal cash, your own personal credit card, then effectively, you're incurring that expense on behalf of the company, and the company owes that to you. And ideally, that should be recorded within your digital accounting system.

You can use spreadsheets and other things, but let's go digital, and let's do this thing properly. Now on the other side, money is going to be withdrawn from the company. It may be withdrawn to pay yourself the salary that's owed to you, it may be taken out to reimburse yourself some of the expenses, or it may be taken out to partly pay or fully pay the money you've put in personally.

Most likely, you might also take out more money than you're entitled to. So we come back to that see-saw effect. During the course of the year, you extract 10,000 pounds out of the business that goes into your personal account, and it works out, the company owes you 5 grand for reimbursed expenses and potentially

funds you put to the company and potentially some that also could be from PAYE salary. Now if the company owes you five and you take out ten, you've taken up more than you're legally entitled to. And that gives you what's called an overdrawn loan account. Now you have two choices, you either leave the loan account as overdrawn.

When it comes to your company's year-end, if that loan account is still overdrawn in what accountants call a debit balance, then the company will pay what's called advanced corporation tax on that. And that could be quite an eye-watering number. What normally happens is that loan, once the formalities are done, will be written off, a dividend will be declared to clear that loan account down, and that loan account then becomes your dividend for the period of time.

Now obviously we have to make sure there's enough profits to justify that conversion of that overdrawn loan account into a dividend, but assuming that is happening, then that's perfectly fine. Now, technically speaking, let's be technical because if you run a company, you're governed by the Company's Act, amongst other things.

And the timing here is crucial. Technically speaking, if you take money out before formally declaring a dividend, HMRC could, in theory, if they discovered this, see it as a way that you avoid tax. That formality of having to do the documentation to support that dividend is, technically speaking, an essential requirement for a company, albeit

many small businesses may not do that either because they aren't aware they have to do that or because they don't have the resources or because they've not received the right advice. In next week's podcast, by the way, I'm going to be looking at the paperwork in a lot more detail. So what can we conclude?

Well, dividends and the loan account are inexorably linked. Dividends allow you to extract profits efficiently, but they have to come from post-tax earnings. I should have added also, by the way, folks, that you need to make sure you've got the cash if you're going to pay dividends beyond your overdrawn loan account. The loan account itself, just think of it as a way that it tracks the money that you take out as a director and the money that is owed to you for things like expenses, salaries, and funds injected.

I hope you found this useful, and I'd love it if you could share with those who you feel will benefit. In next week's podcast, we're going to get down and dirty and have a look at some of the accompanying paperwork, which is a recommendation to complete in order for you to stay compliant and for you to rest easy.

Until next week, happy dividends. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.