Director’s Loan Account in Credit: Can You Charge Interest?

Understanding a Director’s Loan Account (DLA)

A Director’s Loan Account (DLA) records the financial transactions between a company and its directors. In most cases, the account shows a debit balance—meaning the director has withdrawn more funds than they have repaid through salary, dividends, or expense reimbursements.

However, there are situations where the account shows a credit balance. This happens when a director puts more money into the business than they take out. This could include personal loans to the company, unpaid dividends, deferred salary, or covering company expenses personally.

Can a Director Charge Interest on a Credit Balance?

Yes, a director can charge interest when their loan account is in credit. However, the interest rate must be reasonable and commercially justifiable. Charging excessively high rates could raise concerns with HMRC, particularly around whether the loan serves a genuine business purpose.

Typically, a fair benchmark is the rate a business would pay a bank for unsecured borrowing. While rates vary, a range of 6% to 15% per annum is commonly considered acceptable depending on market conditions.

Tax Implications for the Company

Interest paid on a director’s loan is usually treated as a non-trading loan relationship. If the funds are used wholly for business purposes, the company can generally claim this interest as a deductible expense for corporation tax.

For close companies, additional care is required to ensure that interest payments are not treated as disguised distributions. As long as the loan is genuine and the interest rate reflects a commercial return, this risk is minimal.

To claim tax relief:

• Interest must be paid within 12 months of the end of the accounting period.

• The company must deduct basic rate income tax before paying the director.

• A CT61 return must be submitted quarterly.

• A certificate showing tax deducted must be provided to the director.

Failure to follow these rules can lead to penalties and interest charges.

What is a Close Company?

A close company is typically controlled by:

• Five or fewer shareholders (participators), or

• Any number of shareholders if they are also directors

It can also apply where a small group would receive most of the company’s assets if it were wound up.

Tax Implications for the Director

From a personal tax perspective, interest earned on a DLA is treated as savings income.

Depending on the director’s tax band:

• Basic rate taxpayers can earn up to £1,000 tax-free

• Higher rate taxpayers get a £500 allowance

• Additional rate taxpayers receive no allowance

Even if the income falls within these thresholds, tax is still initially deducted by the company, and any adjustments are made through the director’s tax return.

Company Law Considerations

Before charging interest, directors should review the company’s Articles of Association. Most standard Model Articles allow interest payments, but this should always be confirmed.

It’s also essential to formalise the arrangement through a written loan agreement. This should clearly outline:

• The interest rate

• Payment terms

• Calculation method

Proper documentation helps avoid disputes and ensures compliance.

Practical Insight for Directors

Unlike dividends, which can only be paid from profits, interest can be paid even when profits are low—as long as the company remains solvent. This makes it a useful option for directors looking to withdraw funds in less profitable periods.

In smaller businesses, DLAs often fluctuate throughout the year. If interest is being charged, it’s important to agree whether calculations will be based on daily, monthly, or periodic balances—and document this clearly.

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