What an overdrawn DLA actually means
If a director has taken more out of the company than they've put in or been paid through salary and dividends, the DLA is overdrawn. In effect, the director owes the company money. This happens for all sorts of ordinary reasons: drawings taken ahead of a dividend that was never formally declared, personal expenses paid through the company account without proper records, or a slow trading year where dividends couldn't reasonably be justified but drawings carried on regardless.
It's rarely a deliberate decision. It's usually the result of a company's finances and a director's personal finances running through the same account for long enough that the line between the two blurs. HMRC's own guidance on directors' loans, where you owe your company money, sets out the basic mechanics, though the practical implications are usually clearer once someone's actually looked at the numbers.
Why it matters: Section 455
Where a DLA remains overdrawn nine months and one day after the company's year end, the company faces a tax charge under section 455 of the Corporation Tax Act 2010. This charge is pegged to the dividend upper rate, which rose from 33.75% to 35.75% from 6 April 2026, so that's the figure that now applies to loans falling due in the current tax year. It isn't a penalty for wrongdoing. It exists because HMRC treats an unpaid director's loan as a way of extracting value from a company without paying the tax a salary or a dividend would attract.
The charge is repayable once the loan itself is repaid, but that process can take years to work through, and in the meantime the company has had to fund a tax bill on money it hasn't actually received back from the loan going the other way. On a loan of any real size, that's a meaningful amount of cash sitting outside the business for no commercial reason.
There's a second layer worth knowing about too. Loans over £10,000 can be treated as a benefit in kind, which brings additional income tax for the director and Class 1A National Insurance for the company on top. An overdrawn DLA left unaddressed can end up taxed from more than one direction at once, which is exactly the kind of compounding problem that's much easier to head off early than untangle later.
The routes directors usually consider
- Cash repayment. The most straightforward route where the director has the funds available, whether that's repaying the loan in full or in stages before the nine-month deadline.
- Dividend declaration. Where the company has sufficient distributable reserves, a dividend can be declared and offset against the loan, though this brings its own tax position for the director to weigh up (see HMRC's guidance on tax on dividends).
- A formal repayment plan. Structuring a documented schedule to clear the loan, sometimes alongside wider restructuring advice if the DLA sits within a broader set of company issues rather than in isolation.
- Asset-based settlement structures. In certain circumstances a company can settle a loan by transferring value through a structured arrangement rather than a straight cash payment. These sit within specific HMRC rules and depend heavily on the individual company and director's circumstances. They're specialist territory and aren't right for every situation.
Every one of these routes has trade-offs, and what's genuinely appropriate depends on the size of the loan, the company's cash position, how close the nine-month deadline is, and the director's broader financial picture. This is exactly the kind of decision that benefits from an informed conversation before the numbers are finalised, rather than after.
What a worked example tends to show
Take a company with a £200,000 overdrawn DLA. Left unaddressed past the nine-month deadline at the current rate, that triggers a Section 455 charge of £71,500, cash the company has to find and fund on top of whatever pressure created the overdrawn position in the first place. Once a director sees that number sitting on its own like that, the conversation usually shifts fairly quickly from "can this wait" to "which of the available routes actually fits our situation".
Why this is worth addressing before the deadline, not after
Every one of the options above becomes narrower once the nine-month window has passed and the S455 charge has crystallised. It isn't that the situation becomes unfixable. It's that some of the more efficient routes are only genuinely available while the loan is still inside that window. As with HMRC pressure generally, the real constraint here is usually timing rather than the size of the number involved. Our broader piece on the 2026/27 outlook for UK directors covers how this deadline interacts with the wider profit extraction picture for solvent companies.
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- HMRC, Director's loans: you owe your company money, GOV.UK
- Corporation Tax Act 2010, Section 455, charge to tax in case of loan to participator, legislation.gov.uk
- HMRC, Tax on dividends, GOV.UK
This article is provided for general information only and does not constitute tax, legal or financial advice. Tax rates and thresholds referenced, including the Section 455 rate, are correct at the time of writing and may change. Director Options is a signposting service; any specialist structuring is carried out by independent, appropriately qualified firms. Always seek independent professional advice before making decisions about your company's finances.