Director loan account vs business loan: which fits when
UK SMB founders often face a choice between using their own money via the director loan account (DLA) or borrowing commercial finance for the business. The two routes have different tax treatments, different cashflow implications, and different long-term consequences. This guide covers when each fits and the trap to avoid.
Director, BestBusinessLoans
Oliver leads BestBusinessLoans's editorial reviews and methodology. With a background in UK commercial finance, he oversees lender research, rate verification and review independence.
Last reviewed: 11 May 2026
What a director loan account actually is
A DLA is a ledger account between the director (or other participator) and the company recording amounts owed in either direction. The director can lend money to the company (DLA in credit, the company owes the director) or take money from the company beyond salary or dividend (DLA overdrawn, the director owes the company). DLA balances are common in UK SMBs, particularly closely-held companies where the line between owner and entity is operationally fluid.
Tax treatment of DLA in credit
Director lends money to company → DLA in credit. The company can repay the director without tax consequence. The director can charge interest on the DLA loan (treated as savings income on the director, deductible business expense for the company subject to corporation tax rules). The interest must be at a commercial rate to avoid HMRC challenge. Documentation: written loan agreement, board minute, interest rate. For most UK SMBs the DLA in credit is interest-free and undocumented, which is fine for tax purposes but unhelpful for any future commercial reference.
Tax treatment of DLA overdrawn
Director takes money beyond salary / dividend → DLA overdrawn. Two tax consequences. (1) If overdrawn balance exceeds £10,000 at any point, it's a benefit-in-kind taxable on the director at the HMRC official rate (currently 2.25% as of 2025-26). The company pays Class 1A NIC on the benefit (14.53% as of April 2025). (2) If the overdrawn DLA isn't cleared within 9 months of the company year-end, the company pays Section 455 tax at 33.75% of the overdrawn balance. The S455 tax is repaid when the DLA is eventually cleared, but in cashflow terms it's a meaningful penalty.
When to use DLA in credit vs business loan
Four scenarios where DLA in credit fits. (1) Director has surplus personal cash and the company needs short-term working capital. (2) Bridging a 30-90 day cashflow gap where commercial finance setup cost is uneconomic. (3) Avoiding the application + hard-search overhead of commercial finance. (4) The director wants to charge commercial interest as personal savings income (efficient for higher-rate taxpayers). Four scenarios where commercial finance fits better. (1) The cash need is longer-term (over 6 months). (2) The amount is material (over £50k typically). (3) The director's personal cash position is better preserved for other uses. (4) Commercial finance builds the company's independent credit history for future applications.
The DLA-overdrawn trap
UK SMB directors sometimes use overdrawn DLA as de facto short-term finance: take money from the company, use it personally, clear it before the 9-month deadline. This works mechanically but creates risk. (1) If the DLA isn't cleared in time, the S455 tax hits. (2) The benefit-in-kind on balances above £10k creates personal tax exposure. (3) The pattern can be read by HMRC as a tax-planning device rather than a genuine commercial arrangement, particularly if repeated across years. (4) The pattern shows on company accounts (DLA balance) which lenders read as governance concern. The cleaner approach: take salary or dividend with proper documentation; use commercial finance for the actual finance need.
FAQ
Can I lend money to my own company without paperwork?
Legally yes, but in practice some documentation is essential. Minimum: a board minute recording the loan, the amount, the interest rate (or that it's interest-free), and the repayment terms. Without documentation, the loan is harder to evidence in any future commercial context (sale, refinance, insolvency) and may be treated as paid-in capital rather than recoverable loan.
Should the company pay me interest on my DLA in credit?
Depends on context. If the director is a higher-rate taxpayer with surplus savings, charging commercial interest is tax-efficient (the director pays savings rate income tax on the interest, often using personal savings allowance; the company gets corporation tax relief on the interest expense). If the director is a basic-rate taxpayer or the company is loss-making, interest-free DLA in credit is usually cleaner.
What happens to DLA in a company sale?
Share sale: the new owner inherits the DLA balance and either repays the director or restructures. Asset sale: the DLA stays with the seller and either gets repaid at completion (if the company has cash) or remains as an obligation. Most M&A deals require DLA clearance at completion to avoid trapping the balance in either entity. Documentation matters: undocumented DLA can complicate the sale process.
Can a director charge the company for use of personal assets (vehicle, home office)?
Yes, with proper documentation. Mileage rates (45p first 10,000 business miles, 25p thereafter as of 2025-26) for personal-vehicle business use. Use-of-home as office allowance (£6 per week without records, more with proper documentation). These are expense reimbursements rather than DLA transactions and don't carry the DLA tax mechanics.
Do lenders look at DLA balances?
Yes, on management accounts and filed accounts. Lenders read DLA in credit positively (founder has personal capital behind the business) and DLA overdrawn cautiously (potential tax exposure and governance concern). Material overdrawn DLA balances typically trigger questions in underwriting and may affect terms or approval.
Can I have multiple director loan accounts in one company?
Yes, one per director or participator. Each director's DLA is tracked separately. For multi-director companies, the company maintains a separate DLA ledger per director. The tax mechanics (benefit-in-kind, S455) apply per director rather than aggregated.
Reviewed by Oliver Mackman, Director. Last reviewed: 2026-05-11.