How Do I Account for A Director’s Loan?

Being a director in a limited company means you can borrow money from the business (or lend money to it) and account for it as a director’s loan. There are all sorts of tax implications involved though, so it’s incredibly important to keep good records. We explain what director’s loans are, how they work, and how to account for them in your company’s bookkeeping.

What are director’s loans?

A director’s loan is when you, as a company director, borrow money from your company that needs to be paid back. In other words, it’s a payment you get from your company that cannot be classified as legitimate expenses, dividends, or salary.

It works in reverse too. For example, you might lend money to the company to help it through some cash flow issues or to invest in research and development, and then get the money back when the business grows.

You’ll sometimes see the director’s loan account referred to as DLA.

How do I show director’s loans in my company accounts?

It’s useful to show a separate director’s loan account for each director in the business. That way you can record director’s loans like any other transaction in your business to help you keep track of who owes what.

Software like Pandle (that’s us!) will automatically create a director’s loan account for each director in the business. Transactions can be recorded against it as if it were any other type of bank account.

The debtor (where the company is owed money) or creditor (where the director is owed money) will be displayed on the company’s balance sheet.

Do I need to include a director’s loan in the notes section of my accounts?

You don’t usually need to disclose loans given to the company by a director. But in the interests of transparency, it’s a good idea to do it anyway.

As an aside, you must include any advances, loans, or credits made by a company to a director (and any associates) in the notes when you submit your accounts. This should disclose the loan amount, along with the main conditions, interest rate, and any amounts to be repaid or written off.

What can director’s loans be used for?

Director’s loans give access to additional money over and above your salary and/or dividends. They’re handy for covering emergencies or unexpected expenses if you find yourself in a fix. But they do have risks, and require time and effort to administer.

That said, director’s loans can take many forms and might not always be a simple case of advancing cash into or out of your business. For example:

What about transactions between myself and members of my family, friends or other associates?

If your company is a “close” company (which means there are five shareholders or fewer), then you must record any transactions between friends, family, or other associates. This rule also applies if there are more than five shareholders, but those individuals are also directors.

Do companies need to charge interest if a director takes a loan?

The interest rate it charges on a director’s loan is entirely up to the company. Just be aware HMRC view it as a benefit in kind if the interest a company charges to the director is less than the official rate.

This means you’ll need to pay tax on the difference between the official rate and the rate you’ve actually been paying. The company will also need to make Employer’s Class 1 National Insurance contributions at a rate of 15% of the loan’s entire value.

I’m considering a director’s loan. How much can I borrow?

Technically there’s no legal limit as to the amount you can borrow from your company. But! It’s extremely important that you consider very carefully what the company can realistically lend you, and how long it can manage without that money. Avoid creating potential cash flow problems for the future!

Considerations and approval

A director’s loan is automatically considered a ‘benefit in kind’ if it’s more than £10,000 at any point. It means you’ll need to disclose it on your Self Assessment tax return. You’ll also need approval from each shareholder if the loan is over £10,000.

How soon must I repay a director’s loan?

You must repay your director’s loan within nine months and one day following your company’s year-end. If you don’t, you’re liable for a hefty fine.

The good news is that you can claim this tax back once you repay the loan in full. Just be aware that reclaiming can be a drawn out process, so really, it’s best to just pay up on time if you can. The S455 tax rate will increase to 35.75% from April 2026.

I’ve heard it’s possible to take out a director’s loan ‘by accident’. What’s that all about?

This is correct! It’s not uncommon for directors to take as much of their income as possible as dividends for the purposes of tax efficiency. But dividends can only be paid out from profits. If your company hasn’t actually made a profit then you can’t legally take a dividend.

If you don’t pay attention to your accounts, and declare a profit that’s actually a loss, you might pay yourself a dividend thinking your company is in profit. The dividend is therefore illegal, and should be considered as a director’s loan and recorded in the DLA.

It’s yet another reason why we really, really like accurate bookkeeping, and try to make it as achievable as possible.

I want to lend money to my company. How do I do this?

You might want to lend your own money to your company for any number of reasons, using your director’s loan account to account for the loan. Try saying that fast next to a mirror.

If you charge your company interest on the loan, the interest payments you receive are considered income so you’ll need to include them on your Self Assessment tax return.

As far as the company is concerned, the interest it pays to you is a business expense, and will deduct 20% basic rate income tax at source. The company won’t need to pay Corporation Tax in respect of the loan.

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