(For Education Sector Limited Companies)
“I didn’t realise that counted as a loan…”
This is one of the quietest moments we see in meetings with education business directors.
A nursery owner.
A private training provider.
A director of an online education company.
They’re reviewing the year-end accounts and pause at a figure they don’t recognise:
Director’s Loan Account: £18,400 (overdrawn)
There’s usually a moment of confusion, followed by:
“That’s just money I took out when things were tight…
I didn’t realise that was a loan.”
They weren’t being reckless.
They weren’t trying to bend the rules.
They were simply running an education business and trying to keep everything moving.
At Hammond & Co, these moments are never about blame. They’re about understanding how Director’s Loan Accounts (DLAs) quietly build — and why they become risky when no one is watching them.
Why Director’s Loan Accounts are so common in education businesses
Education-sector limited companies are particularly prone to Director’s Loan Account issues — and for understandable reasons.
Education businesses often experience:
- Irregular or term-based income
- Funding delays
- High, fixed staffing costs
- Directors who prioritise learners and staff over themselves
- Directors who only “top up” personal income when needed
This creates a familiar mindset:
“I’ll just take a bit now and sort it later.”
And that is exactly how a Director’s Loan Account begins.
What is a Director’s Loan Account?
A Director’s Loan Account is simply a record of money that:
- A director puts into the company, or
- A director takes out of the company that is not salary or dividends
It is not automatically a problem.
In fact, DLAs can be useful.
The risk is not having one — it’s not knowing what’s happening to it.
When a Director’s Loan Account is absolutely fine
Used intentionally, DLAs can work well.
They are appropriate when:
- A director temporarily funds the business
- Short-term drawings are repaid quickly
- Cashflow timing issues are managed deliberately
- Records are accurate and reviewed regularly
In education businesses, this often includes:
- Covering a funding delay
- Bridging a quiet summer period
- Managing a one-off expense
In these situations, the DLA is doing its job.
The difficulty is that most DLAs don’t stay small or intentional.
How Director’s Loan Accounts quietly become dangerous
Director’s Loan Accounts rarely cause sudden problems.
They creep.
A personal bill paid from the business account.
A transfer during a quiet month.
A delayed dividend.
A salary that was never reviewed.
Each decision feels reasonable at the time.
But gradually:
- The loan balance grows
- No one actively tracks it
- The director forgets it’s there
Until the year-end accounts arrive.
A familiar education-sector pattern
We see this sequence repeatedly:
- Director reduces salary during quieter periods
- Dividends feel unsafe due to cashflow
- Small, informal drawings replace structured pay
- The business grows and pressure increases
- The loan balance quietly builds
- Accounts are prepared — and the issue is revealed
By then, it feels sudden.
But it wasn’t sudden.
It was unmanaged.
Why HMRC pays close attention to Director’s Loan Accounts
HMRC treats an overdrawn Director’s Loan Account as:
The company lending money to the director.
That classification brings tax consequences — even if the director never intended to borrow anything.
The three main tax risks education directors face
1. Section 455 Corporation Tax
If a Director’s Loan Account remains overdrawn nine months after the year-end, the company must pay additional Corporation Tax (known as s455 tax).
Key points:
- Charged at a high rate
- Impacts company cashflow
- Only refundable once the loan is repaid
- Often arises at the worst possible time
For education businesses already balancing VAT, payroll, and reinvestment, this can feel like a penalty for simply keeping the business running.
2. Benefit-in-Kind tax
If a loan exceeds certain thresholds:
- HMRC may treat it as a taxable benefit
- Personal tax can arise for the director
- Interest calculations may apply
This often surprises education directors who think:
“It’s my company — how can this be a benefit?”
Legally, the company and the director are separate — and HMRC enforces that distinction.
3. Illegal dividends hidden inside DLAs
This is one of the most serious issues we encounter.
When:
- Profits don’t exist
- Dividends are still taken
- Cash is available but profit is not
HMRC may argue:
- The dividend was illegal
- The amount should be treated as a loan
- Or worse, reclassified for tax purposes
The result is often:
- Unexpected personal tax bills
- Loss of confidence in the numbers
- Significant stress
Why this hits education directors particularly hard
Director’s Loan Accounts don’t just create tax problems — they create emotional strain.
We often hear:
- “I was just trying to keep things going.”
- “I didn’t want to worry staff.”
- “I thought I’d fix it once things settled.”
Education directors carry responsibility not just for finances, but for learners, parents, staff, and outcomes.
That responsibility should not translate into personal financial risk.
The link between DLAs, director pay, and cashflow
Director’s Loan Accounts rarely exist in isolation.
They are usually a symptom of:
- An unclear director pay strategy
- Poor cashflow visibility
- Lack of regular financial review
DLAs appear when:
- Salary hasn’t been reviewed
- Dividends aren’t planned
- Cashflow isn’t forecast
They are a warning light — not the root problem.
How education businesses keep DLAs under control
Healthy education businesses tend to:
- Plan director pay deliberately
- Clearly separate personal and business spending
- Review DLA balances during the year
- Repay loans proactively
- Use management accounts, not bank balance guesswork
The aim isn’t restriction.
It’s clarity.
How Hammond & Co helps education directors manage DLAs safely
At Hammond & Co, we don’t wait until year-end to address Director’s Loan Accounts.
We support education directors by:
- Explaining DLAs in plain, practical terms
- Monitoring balances throughout the year
- Linking drawings to profit and cash reality
- Planning repayments sensibly
- Reducing personal financial risk
Most DLA issues are completely preventable — once they’re understood.
A moment we often see
There’s usually a point where the tension eases.
Directors realise:
- They’re not alone
- They haven’t failed
- The issue is fixable
With visibility and planning, Director’s Loan Accounts stop being frightening numbers and become manageable tools.
A final thought for education-sector directors
Director’s Loan Accounts are not a sign of bad management.
They are a sign of pressure without planning.
Handled well, they are temporary and harmless.
Ignored, they become costly and stressful.
The difference is understanding — and acting early.
Where this trilogy leaves you
Together, these three blogs explain:
- How to pay yourself properly
- Why cash often feels tighter than profit suggests
- Where risk quietly builds without planning
If any of this feels familiar, you’re not behind.
You’ve simply reached the point where your education business needs structure, visibility, and proactive support — not just year-end accounts.