By Hammond & Co
Introduction
Director’s Loan Accounts (DLAs) are one of the most misunderstood areas of limited company accounting — and one of the most common causes of unexpected tax bills.
For utility-based limited companies, where income is driven by commissions and cash flow can fluctuate significantly, DLAs can quietly become a serious risk. Director drawings are often irregular, income timing is unpredictable, and formal pay planning is sometimes pushed aside in favour of convenience.
Many directors don’t even realise they have a Director’s Loan Account until their accountant raises a concern at year-end — by which point the problem may already be costly.
At Hammond & Co, we see this regularly. In this blog, we explain:
- What a Director’s Loan Account actually is
- Why DLAs commonly arise in utility-based businesses
- The tax consequences of getting it wrong
- Practical ways to stay in control and avoid surprises
What Is a Director’s Loan Account?
A Director’s Loan Account records money moving between you and your company that isn’t salary or dividends.
It tracks:
- Money you take out of the business personally, and
- Money you put into the company from your own funds
In simple terms, it shows who owes who:
- If the company owes you money, the DLA is in credit
- If you owe the company money, the DLA is overdrawn
It’s the overdrawn position that creates risk.
Why DLAs Are So Common in Utility-Based Companies
Utility-based businesses often feel cash-rich one month and under pressure the next.
Directors may:
- Take money out when commission payments land
- Cover business expenses personally during quieter periods
- Smooth cash flow informally without structured pay planning
All of these movements feed into the Director’s Loan Account — often unintentionally.
Common DLA Scenarios We See at Hammond & Co
1. Taking Money Without Declaring Salary or Dividends
Any money taken from the business that isn’t processed as payroll or dividends automatically goes through the DLA.
Many directors assume:
“I’ll tidy it up later.”
Unfortunately, HMRC still expects this to be accounted for correctly — regardless of intent.
2. Paying Personal Expenses from the Company
This often includes:
- Personal travel
- Household bills
- Private subscriptions or memberships
Small amounts can quickly build into a significant overdrawn balance.
3. Using the Business Account as a Personal Buffer
When income fluctuates, it can be tempting to treat the company bank account like a personal overdraft.
This is especially common in commission-based utility businesses — and particularly risky if left unchecked.
Why an Overdrawn Director’s Loan Account Is a Serious Issue
An overdrawn DLA isn’t just untidy bookkeeping — it can trigger real and avoidable tax consequences.
Section 455 Corporation Tax Charge
If a Director’s Loan Account is overdrawn at the company year-end and not repaid within 9 months and 1 day, the company may have to pay an additional corporation tax charge under Section 455.
This charge is:
- Temporary
- A drain on company cash
- Entirely avoidable with proper planning
Benefit-in-Kind Tax
If the overdrawn balance exceeds £10,000 at any point during the year, HMRC may treat it as a cheap or interest-free loan.
This can result in:
- Personal tax for the director
- National Insurance for the company
- Additional reporting requirements
The Cash Flow Trap for Utility Businesses
The biggest issue with DLAs in utility-based companies is timing.
The cash may have already been spent personally, but the tax consequences arrive much later — often at a point when commission income has dipped again.
This creates a double squeeze:
- Personal tax liabilities
- Additional company tax
How DLAs Interact with Dividends
Dividends can be used to clear an overdrawn Director’s Loan Account — but only if:
- The company has sufficient distributable profits
- The dividend is properly declared
- Timing is handled correctly
Attempting to backdate dividends is not compliant and significantly increases risk.
Practical Ways to Stay in Control
1. Know Your DLA Balance
You can’t manage what you don’t measure.
DLAs should be reviewed:
- Monthly or quarterly
- Alongside cash flow and tax forecasts
2. Keep Personal and Business Spending Separate
Clear separation reduces errors and stress.
Where personal expenses are unavoidable, they should be:
- Clearly identified
- Recorded promptly
3. Plan Director Pay Properly
Most DLA problems arise from unstructured pay.
A planned mix of:
significantly reduces the temptation to take ad hoc drawings.
4. Clear DLAs Strategically
Depending on circumstances, options may include:
- Repayment from personal funds
- Declared dividends
- Bonus or salary adjustments
Each option carries different tax implications and should be reviewed carefully.
Why DLAs Often Catch Directors Off Guard
Director’s Loan Accounts don’t appear clearly on bank statements.
They sit in the accounting records — which many directors only review once a year. By then, opportunities to plan have often passed.
The Value of Regular Management Information
Utility-based limited companies benefit significantly from:
- Regular bookkeeping
- Up-to-date management accounts
- Proactive tax reviews
This makes DLAs visible early — when problems are cheaper and easier to fix.
How Hammond & Co Helps Utility-Based Directors
At Hammond & Co, we support directors by:
- Monitoring DLAs throughout the year
- Aligning drawings with profits and cash flow
- Preventing Section 455 charges
- Explaining risks clearly, without unnecessary jargon
Our aim is simple: eliminate surprises and keep you in control.
Final Thoughts
Director’s Loan Accounts are not inherently bad — but unmanaged ones can be dangerous.
For utility-based limited companies, where commissions fluctuate and cash flow varies, DLAs require structure and attention.
If you’re unsure what your Director’s Loan Account balance is right now, that’s usually a clear sign it’s time for a review — and Hammond & Co can help you get ahead of the risk.