What’s a director’s loan and how should I use it?

A director’s loan records money moving between you and your limited company outside salary or dividends, and shows who owes who at any point in time.

In the simplest terms, a director’s loan is just a way of keeping track of money moving between you and your company when it doesn’t go through salary, dividends or expenses.

This might be because you’ve taken money out temporarily, or because you’ve put your own money into the company to cover costs or help with cash flow.

Because your company is a separate legal entity, money always belongs either to you personally or to the business. A director’s loan simply records what happens when money crosses that line, so it’s clear who owes who at any point in time.

In practice, this shows up in two situations. You might take money out of the company that hasn’t been paid as salary or declared as dividends, or you might put your own money into the business, perhaps to cover costs or support cash flow at a particular moment.

When you owe the company money

It’s common for a director’s loan account to move into an overdrawn position from time to time. A personal expense paid from the business account, a short-term transfer, or money taken out before final figures are available can all affect the balance.

The main thing that matters is how long it stays overdrawn. If it remains outstanding beyond nine months and one day after the company’s year end, additional tax can apply at company level. In some cases, there may also be personal tax considerations, depending on the size and terms of the balance.

Because of this, your director’s loan account should be reviewed regularly rather than left until year-end.

Does the money have to come from spare cash?

A common question is whether a director’s loan has to come from surplus cash in the business, or whether it can come from borrowed funds. From an accounting point of view, it can come from either.

If the company uses an overdraft, business loan or other credit facility and then transfers money to you, that still counts as a director’s loan. The position is that the company owes the bank, and you owe the company.

The director’s loan account (DLA) records the second part of that relationship.

HMRC focuses on whether the loan exists and how it’s treated, not where the cash originally came from. However, from a practical point of view, using borrowed money for personal drawings often adds pressure later on. Loan repayments, interest and tax all have to be covered from the same pot.

When the company owes you money

If you put your own money into the company, perhaps in the early days or during a tight period, the company owes you that money back. This creates a credit balance on your loan account.

When the business repays that balance to you it’s usually tax free, because you’re simply taking back money you’ve already introduced. For many business owners, this becomes a useful source of flexibility once cash flow improves.

How director’s loans fit with salary and dividends

Most directors choose to take salary and dividends out of their company. Salary gives you a regular, predictable income. Dividends allow you to take money out of the company when profits are available.

A director’s loan tends to appear when the timing of those two doesn’t quite line up, rather than as a deliberate third way of paying yourself. For many business owners, this is completely normal. It often reflects the day-to-day reality of running a business rather than a problem in itself.

If your DLA is consistently and significantly overdrawn, it can sometimes be a sign that cash flow is a bit tighter than it looks from the bank balance alone.

Keeping your loan account under review alongside profits and cash flow gives you clarity. It makes it easier to see what the business can comfortably support and to plan how you take money out in a way that feels steady and sustainable.

Getting clarity on your position

A director’s loan works best when it’s looked at alongside the rest of your finances, including how you take money from the business and how that supports both everyday living and longer-term plans.

A quick review of your director’s loan account, alongside salary, dividends and cash flow, often brings things into focus. Small adjustments can make the position clearer and help everything feel more settled and easier to manage.

If you want clarity on your director’s loan or how to take salary and dividends, a quick review can help. Speak to us about how this fits in with our Everyday Compliance service.