Many UK company directors are unaware they could owe money to their own business through an overdrawn director's loan account (DLA). This guide explains what a DLA is, why it matters, and how to avoid personal financial risk.
- Overdrawn DLAs are debts directors owe to their company.
- Personal liability can arise if the company becomes insolvent.
- Common causes: taking drawings as dividends without profits, using the company for personal expenses.
- HMRC charges S455 tax and benefit-in-kind if not managed.
- Seek advice early to avoid severe consequences.
What is a Director's Loan Account?
A director's loan account (DLA) records all money moving between you and your company. If you take out more than you put in (excluding salary/expenses), you owe the company money—this is an overdrawn DLA.
How Directors End Up Overdrawn
- Taking drawings as dividends without sufficient profits.
- Paying personal expenses from the business account.
- Withdrawing cash without proper records.
- Declaring dividends when the company is loss-making.
Why Overdrawn DLAs Are Dangerous
If your company becomes insolvent, the overdrawn DLA becomes a personal debt. Insolvency practitioners will pursue repayment, which can lead to legal action, charging orders, or even bankruptcy. HMRC also charges S455 tax (33.75%) on overdrawn DLAs not repaid within nine months of year-end, and benefit-in-kind tax if the loan exceeds £10,000 without interest.
How to Check and Manage Your DLA
- Review up-to-date management accounts or trial balances.
- Ask your bookkeeper or accountant for your current DLA position.
- Repay overdrawn amounts before year-end if possible.
- Record all transactions accurately (salary, drawings, expenses).
- If insolvent, stop taking dividends and seek advice immediately.
Case Study: Settling a Large Overdrawn DLA
Chris Worden from Director First helped a director with a £90,000 overdrawn DLA and significant equity in his home. By negotiating with the insolvency practitioner, the debt was settled for £30,000—far less than the original amount, due to the costs and risks involved in bankruptcy proceedings.
Key Takeaways
- Understand your DLA position at all times.
- Don’t treat company money as personal funds.
- Repay overdrawn amounts promptly to avoid tax and personal liability.
- Seek professional advice early—Chris Worden and Director First specialise in helping directors navigate these issues.
Frequently Asked Questions
- What is an overdrawn director's loan account?
- It's when a director owes money to their company, usually from taking out more than they've put in, excluding salary and expenses.
- What happens if my company goes insolvent with an overdrawn DLA?
- You become personally liable for repaying the debt. Insolvency practitioners can take legal action to recover it.
- How can I check if my DLA is overdrawn?
- Review your management accounts or ask your accountant/bookkeeper for your current DLA balance.
- What is S455 tax?
- S455 tax is a charge by HMRC on overdrawn DLAs not repaid within nine months of year-end, currently at 33.75%.
- Can I negotiate a settlement on an overdrawn DLA?
- Yes, settlements are possible, especially if bankruptcy would be costly or time-consuming for creditors.
