The Overdrawn Director's Loan Account in 2026

For many company directors, the single most overlooked personal risk is not a guarantee they signed or a debt they personally guaranteed — it's a number sitting quietly on the balance sheet: the Director's Loan Account. If that account is overdrawn, you owe your own company money. And in the wrong circumstances, that "internal" figure can transform into a real personal liability pursued by a liquidator and challenged by HMRC.

What Is a Director's Loan Account?

A Director's Loan Account (DLA) is simply the running record of money flowing between you and your company. When you put personal money into the company, the account is in credit and the company owes you. When you take money out — beyond salary, lawful dividends, or legitimate expense reimbursements — the account goes overdrawn, and you owe the company. Directors often fall into an overdrawn DLA without realising, typically by drawing irregular "drawings" against assumed future profits.

The s.455 Corporation Tax Charge

An overdrawn DLA carries a sharp tax sting. Under section 455 of the Corporation Tax Act 2010, if the loan is not repaid within nine months and one day of the company's year-end, the company must pay a temporary tax charge of 33.75% on the outstanding amount (under the current dividend upper rate). This is effectively an interest-free deposit to HMRC that is only refunded once the loan is repaid — tying up cash the struggling company can ill afford to lose.

Overdrawn DLA vs. Illegal Dividend

This distinction is critical. A dividend is only lawful if the company has sufficient distributable reserves. If directors take "dividends" without adequate profits, those payments can be reclassified as unlawful — and repayable. An overdrawn DLA and an unlawful dividend often overlap: money taken out informally can be recharacterised by a liquidator as an unlawful distribution, putting a director under pressure to repay it personally. The lesson is to document every withdrawal and ensure the board approves dividends only against genuine reserves.

What Happens to an Overdrawn DLA in Insolvency?

When a company enters liquidation or administration, the overdrawn DLA becomes an asset of the company — and the liquidator has a duty to collect it. If you cannot repay, the liquidator can pursue you personally, up to and including court action and, in serious cases, bankruptcy. This is not theoretical: recovering overdrawn DLAs is one of the most common ways insolvency practitioners generate funds for creditors, and it is frequently the surprise that turns a director's "clean" insolvency into a personal crisis.

How to Legally Clear or Reduce an Overdrawn DLA

• Credit salary or bonus — properly authorised and recorded through payroll
• Declare lawful dividends — only where genuine distributable reserves exist
• Make a capital contribution — repay the loan from personal funds
• Set against a company debt to you — where the company genuinely owes you money

Crucially, these steps must be done before insolvency is on the horizon and with proper legal and accounting advice — attempting to "write off" or disguise an overdrawn DLA on the eve of liquidation can itself give rise to a misfeasance claim.

6 Red Flags Your DLA Is About to Become a Problem

1. The overdrawn balance has been growing quarter after quarter with no repayment plan
2. Your accountant has flagged the s.455 charge and it's being paid from an overdraft
3. Withdrawals are recorded vaguely, without board minutes or clear purpose
4. The company is struggling and you're considering insolvency
5. You've "taken more out" informally to cover personal cash-flow gaps
6. A liquidator or HMRC has begun asking questions about director withdrawals