The Difference Between Director’s Loan Accounts and Dividends (and Why It Matters)
Chrissy Leach • 20 October 2025
Understanding how DLAs and dividends work can save you tax and stress.
Running your own limited company gives you flexibility in how you pay yourself, but with that freedom comes responsibility. Two of the most common ways directors take money out of their companies are through a director’s loan account (DLA) and dividends. While both can seem similar on the surface - money leaving the company - there are big differences in how they work, and getting it wrong can cost you dearly.
In this blog, we’ll break down what DLAs and dividends are, the risks of mixing them up, and how to avoid common pitfalls like overdrawn accounts and unexpected tax charges.
What is a Director’s Loan Account (DLA)?
A director’s loan account is simply a record of money that moves between you (the director) and your company, outside of salary and dividends.
For example:
- You lend the company £5,000 to cover cash flow - this goes into your DLA as a credit.
- You take £2,000 out of the company for personal use, not as salary or dividends - this goes into your DLA as a debit.
At any time, your DLA shows whether the company owes you money (in credit) or you owe the company money (overdrawn).
What are Dividends?
Dividends are payments made to shareholders out of company profits after tax. Unlike loans, they don’t need to be repaid. However, dividends can only legally be paid if the company has enough retained profits.
For example:
- If your company made £30,000 profit last year (after Corporation Tax), you can vote to distribute part of that profit as dividends.
- If the company has no retained profit, dividends cannot be paid - even if there’s cash in the bank.
Problems When Taking Money the Wrong Way
Here’s where things often go wrong. Many directors treat the company bank account like their own and withdraw cash when they need it, or pay for personal expenditure via the company bank account. But if those withdrawals aren’t properly declared as dividends or salary, they’ll sit in the DLA instead.
That’s not necessarily a problem - unless your DLA becomes overdrawn.
Overdrawn DLAs and the Dreaded S455 Tax Charge
An overdrawn DLA means you owe money to your company. HMRC doesn’t like this, because in effect you’ve borrowed money from your company without paying tax on it.
If your DLA is still overdrawn nine months after your company’s year-end, the company has to pay a special tax charge called Section 455 (S455) tax - currently 33.75% of the outstanding balance.
For example:
- You withdraw £10,000 from the company in July.
- The company year-end is 31 December.
- If that £10,000 hasn’t been repaid by the following 30 September, the company owes £3,375 in S455 tax.
The good news? If you repay the loan later, the S455 tax can eventually be reclaimed - but only after a long delay, which can seriously affect cash flow.
The Benefit in Kind for Loans Over £10,000
If your director’s loan exceeds £10,000 at any point in the tax year, HMRC treats it as a benefit in kind - because you’ve effectively received an interest-free (or low-interest) loan from your company.
That means:
- You’ll pay income tax on the notional interest you “should” have paid.
- The company must also pay Class 1A National Insurance on the benefit.
The charge is calculated using HMRC’s official interest rate. To avoid this, you can either repay the loan quickly or pay the company interest at least equal to the official rate.
How to Avoid DLA Problems
The key is good bookkeeping and forward planning. Here are our top tips:
✅ Plan your salary and dividends in advance so you know what you can take.
✅ Check profits before declaring dividends - never rely just on bank balance.
✅ Keep your DLA under control by recording every transaction accurately.
✅ Repay loans quickly if you do take money out temporarily.
✅ Work with an accountant who can guide you on the most tax-efficient way to withdraw money.
Why This Matters
Mixing up DLAs and dividends can lead to:
- Unexpected personal and company tax bills.
- Cash flow headaches for your business.
By understanding the difference and planning ahead, you can take money out of your company with confidence - and avoid nasty surprises.
Need Help With Your Director’s Loan Account?
At CJL Accountancy, we work with limited company owners every day to make sure they’re paying themselves in the most tax-efficient way. Whether you’re worried about an overdrawn DLA, unsure if you can declare dividends, or want to avoid the S455 tax trap, we can help.
📞 Get in touch today
for clear, friendly advice tailored to your business.
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