Overdrawn Directors’ Loan Account and Repayment

Overdrawn directors’ loan accounts can come to be a real cause for concern; particularly in the context of a company entering insolvency.

Therefore it is important to understand the nature of these financial facilities, how they work, and why they can cause problems for directors and their creditors particularly if insolvency is on the horizon.

“In most of the insolvency cases I deal with, the overdrawn DLA is the issue that catches directors most off guard. They’ve been withdrawing money steadily during good years and genuinely don’t realise the running total until we sit down together.” 
- Julie Palmer, Partner, BTG Begbies Traynor

What is a Director's Loan Account?

A director’s loan account is essentially a means through which a director removes money from their company in a way which isn’t related to dividends or payroll processes. Where no money is removed from a company, a director’s loan account can be considered as being at a zero level. The account will effectively be in credit where a director puts their own money into a company to cover expenses or costs relating to the purchase of specific assets.

What happens when going overdrawn?

Director’s loan accounts are generally a subject of scrutiny for a variety of relevant parties because they differ significantly from the processes involved in loaning money from business accounts in the context of sole trading or self-employed business operations. This is particularly the case when an account becomes overdrawn to a significant degree and when a relevant company finds itself facing financial distress of any kind.

An overdrawn director’s loan account describes a situation in which a director has taken more money out of a company than they have put in, not including dividends or salaries. These overdrawn amounts are counted as assets on the balance sheets of the companies involved until they are repaid.

Tax issues

Being overdrawn in this sense isn’t necessarily a problem for a company or a cause for concern for directors, as long as records are kept of all relevant transfers and amounts owed are settled within nine months of the company’s financial year end.

However, where these amounts are not repaid and the sums involved are in excess of £10,000, HMRC may take the view that a director has effectively been taking money out of their company as income, and they may therefore look to levy taxes on that basis. 

The section 455 tax charge is a corporation tax charge that applies to overdrawn director's loan accounts that are not repaid within a fixed period. The tax charge applies if your director's loan account is overdrawn and the outstanding loan is not repaid within nine months and one day after the end of the company's accounting period.

The tax rules on overdrawn director's loan accounts changed in April 2026. The section 455 tax charge increased to 35.75% for loans made on or after 6 April 2026 for close companies. This is a two-percentage-point increase from the previous rate (33.75%) which applies to loans taken out on or after 6 April 2022 (loans predating this are charged at 32.5%).

“Since the April 2026 increase in the section 455 charge, we’ve seen a noticeable uptick in directors contacting us specifically about DLA tax exposure. The jump to 35.75% has made this a much more urgent issue for owner-managed businesses than it was previously.”
- Julie Palmer, Partner, BTG Begbies Traynor

What happens to a director's loan account during insolvency?

In the context of a company entering insolvency, liquidators appointed to settle whatever debts they can on behalf of a business in distress will view an overdrawn director’s loan account as an asset to be pursued. So a director who has taken money out of their company in a manner other than through dividends or loans will then be liable to pay back those amounts to satisfy the company’s creditors. This, of course, can put pressure on the personal finances of directors whose business is being liquidated.

Overdrawn directors loan accounts are a common problem in insolvency

Making use of a director loan account is a common practice and not a problem if relevant records are kept and a director can pay back the amounts involved when necessary. In practice, however, loan accounts are often underestimated as a potential source of financial difficulties.

What often happens is that a director will take money out of his or her company when the business is progressing well but then struggle to pay back these amounts when trading takes a turn for the worse. This scenario is so common in fact that between 75% and 80% of business insolvency cases we handle involve overdrawn director loan accounts in some form or other.

Of the directors we’ve spoken to in the last six months, well over half had no plan in place for repaying their overdrawn DLA before they contacted us. In many cases, directors tell us they weren’t fully aware of the running balance until their accountant flagged it or the company began to struggle.

What we typically see

A director of a construction firm came to us after withdrawing approximately £85,000 over three years during a period of strong trading. When contracts dried up and the company entered insolvency, they faced the prospect of repaying the full amount to satisfy creditors.  By working through the records together, we identified legitimate business expenses within that figure — fuel costs, site visits, client entertainment — which reduced the claimable amount significantly. We helped the director negotiate a manageable repayment arrangement with the liquidator, avoiding personal bankruptcy.

Can overdrawn director loan accounts be written off?

A company may decide to write off a debt owed by a director as an overdrawn loan amount. However, this is not necessarily the end of the story, at least in a situation whereby liquidators have been appointed to raise as much money as possible from a business entering insolvency. Under these circumstances, the liquidator would be likely to pursue the director involved for the amounts owed regardless of whether or not his or her company had previously written off the debt.

Liquidators have a legal duty to pursue every possible avenue that may lead to creditors being satisfied in full or in part in the context of a company being rendered insolvent and having its assets liquidated. Unfortunately for individual directors, this can lead to them being pursued for debts they owe due to overdrawn director loan accounts and, where these debts cannot be paid, the individuals can find their company’s insolvency leading directly to their own personal bankruptcy.

There are situations in which a liquidator will deem the amounts owed by directors to a company to be relatively insignificant and not worth pursuing. This though will depend on the amounts involved.

It’s also worth being aware that attempting to reduce an overdrawn DLA by declaring the balance as a dividend or bonus shortly before the company enters insolvency is likely to be challenged by the liquidator. These transactions may be reversed as preferences or transactions at an undervalue, and could attract further scrutiny of the director’s conduct.

Can an overdrawn directors loan account lead to wrongful trading claims?

If a director continues to withdraw money from the company through their loan account at a time when the company is already insolvent, or when they ought to have known insolvency was likely, this can be treated as wrongful trading or misfeasance by the liquidator.

In serious cases, this could lead to the director being held personally liable for a contribution to the company’s debts beyond just the overdrawn directors loan account balance. It can also result in director disqualification proceedings, which would prevent the individual from acting as a director for up to 15 years.

This is one of the reasons we always advise directors to seek professional advice as early as possible. If you’re aware your company is struggling and your DLA is overdrawn, taking action now, rather than continuing to withdraw, can significantly reduce your personal exposure.

What if I can’t afford to repay my overdrawn directors’ loan account?

If the overdrawn amount is more than you can afford to repay in full, there are several options that may be available to you:

• Negotiating a repayment plan with the liquidator — In many cases, the liquidator will accept a reasonable repayment arrangement rather than pursuing the full amount through the courts. This is often the most practical outcome for both sides.
• Reducing the claimable amount — If you can demonstrate that some of the withdrawals were legitimate business expenses (travel, client meetings, equipment purchases), these can be offset against the overdrawn balance. However, you’ll need records to support each claim.
• Personal insolvency options — In cases where the overdrawn amount is substantial and the director has no realistic means of repaying, options such as an Individual Voluntary Arrangement (IVA) or, in the most serious cases, personal bankruptcy may need to be considered.

Whatever your circumstances, the earlier you speak to a licensed insolvency practitioner, the more options are likely to be available to you.

How to protect yourself if your directors' loan account is overdrawn

1.     Check the exact balance with your accountant. Many of the directors we speak to don’t know the current figure, and in our experience, it’s almost always higher than they expect.

2.     Gather records of any legitimate business expenses. Money withdrawn for genuine business purposes, such as client entertainment, travel, equipment, may reduce the claimable amount. But you’ll need documentation to support this.

3.     Stop withdrawing if the company is struggling. Continuing to draw down your DLA while the company is in financial difficulty can significantly increase your personal exposure, including the risk of wrongful trading claims.

4.     Speak to a licensed insolvency practitioner early. The earlier you get advice, the more options are available. Once a liquidator is appointed, the window for negotiation narrows significantly.

Getting the best advice

The issue of overdrawn director loan accounts, particularly in the context of a company becoming insolvent can be complicated by a variety of factors, not the least of which can be the potential tax implications.

Whatever your circumstances, getting timely advice is crucial. An overdrawn directors’ loan account doesn’t have to lead to personal bankruptcy, but the earlier you speak to someone, the more we can do to help you manage the situation.  Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation. We speak to directors in your position every day, and we’ll give you an honest, clear picture of where you stand.