By Chris Worden, Founder & Licensed Insolvency Practitioner, Director First
Let me tell you about a call I took not long ago.
A director rang us — let's call him David. He'd already signed liquidation paperwork with another firm. Paid his £4,000 fee. Thought that was it. Job done.
Three months later, that firm was demanding he repay £54,000 from his overdrawn Director's Loan Account. His wife didn't know. His accountant hadn't flagged it. And the liquidator had zero interest in negotiating.
Nobody had told David to check his DLA before he signed anything.
That one conversation — had just six weeks earlier — would have changed everything.
What Is a Director's Loan Account, and Why Does It Matter Right Now?
Your Director's Loan Account (DLA) is a running record of every transaction between you and your limited company that falls outside of salary and formally declared dividends.
Used the company card for a personal purchase? DLA. Transferred money to your personal account to cover the mortgage? DLA. Taken drawings over and above what profits could support? DLA.
When the company is healthy, this is a flexible and entirely legitimate tool. Many directors use it intelligently throughout the year. But the moment the company runs into financial difficulty, that number on the balance sheet changes character completely. It stops being a working arrangement. It becomes a personal debt you owe to your own company — and in a liquidation, it becomes an asset that a Liquidator is legally required to recover.
That's the part most directors don't know until it's too late.
The 2026 Reality: HMRC Has Stopped Waiting
Something shifted in how HMRC operates over the past two years, and directors are starting to feel it.
HMRC now uses AI-driven data matching to cross-reference your company's VAT filings and Corporation Tax returns against your personal Self-Assessment — in real time. The days of inconsistencies sitting unnoticed until a manual audit are largely gone.
For overdrawn DLAs specifically, there are two pressure points you need to understand in 2026:
The £5,000 Benefit-in-Kind Threshold
If your DLA is overdrawn by more than £5,000 and you're not paying the HMRC Official Rate of Interest (currently 3.75%), the loan is automatically classified as a Benefit in Kind. That triggers personal Income Tax and National Insurance on the benefit — reported through your Self-Assessment, collected by HMRC, and increasingly flagged automatically through their data systems.
The Section 455 Charge
This one hits the company directly. If the overdrawn DLA isn't repaid within nine months of the company's year-end, HMRC levies a 33.75% Corporation Tax surcharge on the outstanding balance under Section 455.
On a £30,000 DLA, that's £10,125 in additional tax — due from a company that's likely already struggling to pay its existing creditors. For many of the directors we speak to, this charge is the final trigger that makes insolvency unavoidable.
If you're already receiving pressure from HMRC on other matters, read our guide on dealing with HMRC arrears — the approach you take in the next few weeks matters enormously.
What Happens to Your DLA When the Company Goes Into Liquidation?
This is the conversation I have every single week. And it's the one that tends to change everything for directors who haven't had it yet.
The moment a Liquidator is appointed — whether through a Creditors' Voluntary Liquidation that you initiate, or a compulsory winding-up order forced through the courts — they have one primary obligation: recover money for your creditors.
Your overdrawn DLA is one of the assets they're recovering.
It doesn't matter that you're the founder. It doesn't matter that you built the business over fifteen years. To the Liquidator, that balance is treated the same as a piece of machinery or money owed by a customer. They are legally obligated to collect it.
If you can't pay, the tools available to them include:
- Issuing a Statutory Demand against you personally
- Applying for a Charging Order over your home
- Petitioning for your personal bankruptcy
This catches directors completely off-guard, because they assume liquidating the company draws a line under everything. It doesn't — not when there's an overdrawn DLA on the books that nobody discussed before the paperwork was signed.
For a full picture of what directors face in liquidation, see our guide on director risks during company closure.
Real Case: £90,000 DLA. Settled for £30,000.
A director came to us with a significant problem. His company was entering liquidation and his DLA stood at £90,000 overdrawn. He owned property with equity in it — which meant, under normal circumstances, a Liquidator would be entitled to pursue a charging order and push for full repayment.
On paper, he was looking at losing a substantial portion of that equity, or worse.
Because he came to us before any Liquidator was formally appointed, we were able to represent his position properly. We assessed his full personal financial picture, modelled what the realistic cost and timeline of bankruptcy proceedings would be for creditors, and entered into negotiation.
The debt was settled for £30,000.
That's a £60,000 difference — achieved because he had professional representation, came in early enough to have leverage, and understood his position before anyone else dictated the terms.
That outcome isn't unusual when directors act early. It becomes almost impossible when they don't.
The "Quick Fix" That Creates a Bigger Problem
Every week, I speak to directors who've tried to solve their DLA problem without advice before contacting us. The most common move? Declaring a dividend to wipe out the balance right before insolvency.
I understand why it seems logical. If you declare a dividend equal to your overdrawn DLA, the books balance. The debt disappears. Problem solved.
Except it isn't.
Dividends can only be paid from distributable profits. If your company is insolvent — meaning it can no longer pay its debts as they fall due — those profits don't legally exist. Any dividend declared in this state is unlawful.
When the Liquidator reviews your accounts — and they will, going back years — they'll simply reverse the transaction. The debt goes straight back onto your DLA. And because you attempted to declare an unlawful dividend while knowing the company was in difficulty, the Liquidator may report the conduct to the Insolvency Service.
The consequence? Director disqualification. For up to 15 years.
I've seen this happen to directors who were genuinely trying to do right by their creditors and their family. They didn't act out of malice — they acted without professional guidance at a moment when guidance was the only thing that would have protected them.
Is a CVA an Option Before It Gets to Liquidation?
For some directors, the answer to an overdrawn DLA isn't liquidation at all — it's restructuring the company so the DLA can be properly addressed over time while the business continues to trade.
A Company Voluntary Arrangement (CVA) allows a viable business to reach a formal agreement with creditors, including HMRC, to repay debts at a rate the company can actually sustain. If the underlying business has genuine prospects, this can be a far better outcome than closure — for the director, the employees, and the creditors themselves.
The key question — and it's one we assess free of charge — is whether the business is viable. Not every company should be rescued. But more of them can be than directors realise when they're in the middle of the crisis.
There Is a Way Through — But the Clock Is Ticking
The biggest thing I want directors to take from this is simple: your options are determined by when you pick up the phone.
Negotiate a realistic settlement — based on what you can actually afford and what it would genuinely cost a Liquidator to pursue you, not a number pulled from a balance sheet with no context.
Structure a repayment plan — monthly schedules that satisfy the legal requirements of the liquidation process without forcing the sale of your home or triggering personal bankruptcy.
Clean up your accounts properly — not everything on a DLA is a personal loan. Business expenses that were miscoded, legitimate salary arrangements, personal contributions to the company — we review everything to establish the accurate figure before any negotiation begins.
Wait until a creditor forces a winding-up petition through the courts, and those options narrow dramatically. The Liquidator's job changes. The timeline compresses. And your ability to negotiate disappears.
Don't Wait for the "Dear Director" Letter
An overdrawn DLA isn't automatically a crisis. We resolve them routinely — through settlements, repayment plans, and careful account validation — for directors who come to us while they still have the power to influence the outcome.
The directors who face the worst consequences are, almost without exception, the ones who waited.
If you're worried about an overdrawn Director's Loan Account, call us today for a free, confidential conversation.
No judgment. No obligation. Just a straight assessment of your position — and your options — while you still have them.
Director First — 0800 086 2766 | Book a Free Assessment | directorfirst.co.uk
Chris Worden is the founder of Director First, a Licensed Insolvency Practitioner and advisor to UK company directors facing HMRC pressure, company debt, and financial difficulty. He went through company insolvency himself and built Director First to give directors the advice he never received.
