Overdrawn Director’s Loan Accounts and Insolvency

A director’s loan account, or DLA, is overdrawn when you, as a director, owe money to your own company, rather than the other way round. If your company becomes insolvent while that balance is outstanding, it doesn’t disappear. It becomes an asset the liquidator has a statutory duty to pursue, generally in full, regardless of the company’s wider financial troubles.

This surprises a lot of directors, particularly those who’ve drawn on the account informally over the years without thinking of it as a debt they personally owe. This guide explains what a DLA is, the tax charge that applies to it, what happens if the company becomes insolvent while it’s overdrawn, and your options for settling it.

Key takeaways

• An overdrawn DLA means you owe the company money. It doesn’t vanish if the company becomes insolvent.
• If it’s still outstanding nine months and one day after your accounting period ends, the company faces a tax charge under section 455 of the Corporation Tax Act 2010, currently 35.75% of the balance for loans made on or after 6 April 2026.
• In a liquidation, an overdrawn DLA is treated as a company asset. The liquidator is obliged to pursue you for repayment, separately from any s455 tax already paid.
• Repaying, or agreeing a realistic settlement, before or during a liquidation is almost always better than leaving it to escalate.
• Taking advice early gives you far more room to negotiate a manageable outcome.

What is a director’s loan account?

A director’s loan account is simply the running record of money moving between you and your company outside of salary, dividends and reimbursed business expenses. If you take money out of the company that isn’t one of those things, for example to cover a personal bill, it’s recorded as a loan from the company to you, and the account becomes overdrawn.

It’s easy for this to build up gradually and without much thought, particularly in smaller companies where directors move money in and out informally. The balance is entirely legitimate to have. The issue is what happens if it’s still outstanding when the company’s accounts are finalised, or, more seriously, if the company later becomes insolvent.

The s455 tax charge, explained

Section 455 of the Corporation Tax Act 2010 is designed to stop directors using loans as a way of extracting money from the company without paying the tax that would apply to a dividend or salary.

If your DLA is still overdrawn nine months and one day after the end of the accounting period in which the loan was made, your company must report the balance on its Corporation Tax return and pay s455 tax on it. The current rate is 35.75% of the outstanding balance for loans made on or after 6 April 2026 (loans made between 6 April 2022 and 5 April 2026 are charged at the earlier rate of 33.75%). For example, a £20,000 balance still outstanding at the deadline would trigger a charge of £7,150 at the current rate.

This charge is paid by the company, not by you personally, and it’s temporary: once the loan is genuinely repaid, the company can reclaim the s455 tax from HMRC, though not until nine months after the end of the accounting period in which repayment happened. If the balance exceeds £10,000 at any point in the tax year, a separate benefit-in-kind charge can also apply on the notional interest, which is a personal tax matter for you rather than the company.

What happens to an overdrawn DLA if the company becomes insolvent

This is where directors are most often caught out. If your company enters an insolvent liquidation while your DLA is overdrawn, the balance is treated as an asset of the company, exactly like an unpaid invoice owed to it by a customer.

The liquidator has a statutory duty to realise that asset for the benefit of creditors, which means they will pursue you personally for the full outstanding balance. This is separate from, and unaffected by, any s455 tax the company has already paid on the loan. Paying the tax charge does not settle the debt itself.

If you can’t repay the balance in full, the liquidator can, in serious cases, take legal action to recover it, and an unresolved DLA can ultimately contribute to personal bankruptcy proceedings if it’s left unaddressed. It’s also one of the areas a liquidator will scrutinise closely as part of their review of director conduct, so how the account was built up, and whether it was used appropriately, matters.

Settlement and repayment options

None of this means an overdrawn DLA is unmanageable. It usually means it needs addressing directly, ideally before a liquidation begins.

If your company isn’t yet insolvent, the simplest route is to repay the balance directly, or to offset it against dividends or bonuses you’re genuinely owed, provided that’s done properly and not simply to avoid the s455 deadline. If your company is heading towards a Creditors’ Voluntary Liquidation, it’s worth raising the DLA position with us as part of that conversation. In many cases, we can agree a realistic personal repayment plan with the liquidator rather than the balance being pursued as a lump sum, particularly where you engage early and openly rather than waiting to be chased.

What you shouldn’t do is try to write the loan off informally, or hope it gets overlooked. It won’t. A liquidator’s investigation covers director’s loan accounts as standard, and being upfront about the balance from the outset is far better for your position than having it surface later in the process.

For a broader look at how your other duties change once a company is insolvent, see our guide to directors’ duties when insolvent, or, if closure is already the likely outcome, our page on closing a company with debts.

Frequently asked questions

Can I just write off my director’s loan account if the company is closing?

Not informally, no. If the company enters insolvent liquidation, the liquidator has a statutory duty to pursue an overdrawn DLA as a company asset. Writing it off yourself beforehand can also be challenged as a transaction at undervalue.

 

Do I still owe the money if the company has already paid s455 tax on my loan?

Yes. The s455 charge is a separate tax matter for the company. It doesn’t settle the underlying debt you owe, which the liquidator will still pursue in full.

 

What happens if I can’t repay an overdrawn DLA?

Talk to us as early as possible. In many cases a realistic instalment arrangement can be agreed with the liquidator. Left unaddressed, the liquidator can take formal recovery action, which can ultimately extend to personal bankruptcy in serious cases.

 

Is an overdrawn director’s loan account illegal?

No, it’s a normal part of running a company and entirely legitimate to have. The risk isn’t the balance itself; it’s leaving it unresolved once the company becomes insolvent, or once the s455 deadline has passed.

 

Does the benefit-in-kind charge apply on top of s455?

It can. If the average balance during the tax year exceeds £10,000 and you haven’t paid interest at HMRC’s official rate, a separate benefit-in-kind charge applies to you personally, alongside the company’s s455 liability.

 

Author: Mike Chamberlain, Founder & Licensed Insolvency Practitioner