What is a director’s loan account? – a guide for contractors

You might have heard your accountant mention a “director’s loan account” in your limited company. What does this mean, and should you be concerned about it?

While common in small companies, it can lead to unexpected tax charges if not handled correctly.

In this guide, Emily Coltman FCA, Chief Accountant to FreeAgent, explains more.

What is a director’s loan account?

If you operate through a limited company, you must remember that the company is a separate legal entity from you, even if you are its only director and shareholder. That means the company’s money is not your personal money.

In simple terms, a director’s loan account exists if you owe money to the company, or it owes money to you.

If the company owes you money

You might spend your own money on business expenses, such as taking the train to visit a client and paying for that ticket on your personal card.

As long as these are legitimate business expenses, the company can reimburse you without any additional tax implications.

Until you are repaid, the company owes you money. This appears on the balance sheet as a liability (a creditor).

Other reasons why the company might owe you money include:

• You travelled on company business in your own car.
• You transferred assets into the company, such as a computer.
• You incorporated from a sole trader business and recognised goodwill.
• The company has declared a dividend but not yet paid it (see dividend guidance).
• The company has not yet paid your salary.

If you owe the company money

If you take out more than the company owes you, then you will owe that money back to the company. This is known as an overdrawn director’s loan account.

This will appear as an asset on the company’s balance sheet.

While that may sound positive, it can create tax issues.

Overdrawn director’s loan accounts can lead to additional tax charges in two main ways.

Section 455 tax

If the loan is not repaid within nine months and one day after the company’s year end, the company must pay a Section 455 tax charge.

The rate is currently aligned with the higher dividend tax rate (35.75% from April 2026).

You can read more in HMRC guidance here.

This is a temporary tax, which can be reclaimed once the loan is repaid, but it can still create cash flow issues.

Benefit in kind (BIK)

If you owe the company more than £10,000 at any point during the year, the loan may be treated as a benefit in kind.

This must be reported on a P11D, and your company may also have to pay employer’s National Insurance.

You may also pay personal tax on the benefit, depending on the interest charged.

For broader context, see how limited company tax works and director salary planning.

To avoid these issues, it’s generally best to ensure that your director’s loan account does not become overdrawn, or is repaid promptly if it does.

Further information

Emily Coltman FCA is Chief Accountant to FreeAgent, which provides online accounting software for small businesses and freelancers. Try it for free here.