Managing an overdrawn Director’s Loan Account (DLA) has changed significantly over the past few years. 

The Autumn Budgets of 2024 and 2025 along with recent legal cases have meant that the fiscal tightening around DLAs have made them a primary target for HMRC. 

If your company is facing liquidation then an overdrawn DLA is no longer just a bookkeeping issue; it’s a personal liability that can threaten your private assets if not dealt with correctly. 

Here’s everything you need to know about the regulations and risks governing DLAs in 2026. 

A Stricter Tax Environment 

The rules regarding how DLAs are taxed and reported have tightened, increasing the cost of non-compliance:

  • Increased S455 Tax Rate: The Corporation Tax surcharge on overdrawn DLAs (Section 455 tax) has increased to 35%. This tax will apply if the loan is not repaid within nine months of the company’s financial year-end. While this tax is refundable to the company once the loan is repaid, it represents a massive cash-flow hit at the outset. 
  • Lower Reporting Threshold: In an increasing push for transparency, companies are now required to report overdrawn DLAs exceeding £5,000 to HMRC. This is a 50% reduction from the previous £10,000 threshold.
  • Higher Payments: The official interest rate used to calculate Benefit-in-Kind (BiK) charges on interest-free loans is 3.75%. If you borrowed more than £5,000 without paying interest at this rate, you’ll face additional personal income tax and National Insurance contributions.

The DLA as a Company Asset

When a company goes into liquidation, any overdrawn DLAs are legally classified as company assets.

The statutory legal duty of a liquidator is to realise as much as they can from assets to repay creditors. Consequently, you will be pursued for the repayment of an outstanding DLA. This could include issuing statutory demands; County Court Judgements (CCJs); charges on personal property possibly leading up to bankruptcy proceedings if the debt exceeds £5,000.

The “Reclassification” Trap

A common defence in 2026 involves directors attempting to claim that money withdrawn from the business was in the form of salary or dividends, not a loan. Some recent legal cases have provided precedents that have made this defence difficult to implement from now on. 

  • Retrospective Reclassification Fails: Courts have held (notably in Jones v The Sky Wheels Group) that directors cannot simply recharacterise drawings as remuneration after the fact. If withdrawals are originally recorded as a loan to avoid PAYE and NICs, then they cannot later be claimed as salary to avoid repaying the liquidator.
  • Illegal Dividends: If directors attempt to clear a DLA by declaring a dividend when the company is insolvent (or lacks distributable profits), the dividend is viewed as unlawful. The liquidator will reverse this transaction and demand you repay the illegal dividend personally. 

Tax consequences of a “write-off”

If you cannot repay an overdrawn directors’ loan and the liquidator agrees to write it off then the problems might not go away but will simply move from the liquidator to HMRC.

  • Income Tax Charge: If a directors’ loan is written-off then it will be treated as tax-free income. This must be declared on your personal Self-Assessment tax return otherwise this could lead to a large personal tax bill.
  • The Quillan Precedent: A 2025 tribunal case (Quillan v HMRC) provided a nuance – if a liquidator decides not to pursue the debt but does not formally deed to release or write it off (although reserving the right to pursue it later), a tax charge may not immediately arise. This leaves the debt hanging over the director indefinitely.

Mitigation – Negotiation is possible

Having an overdrawn DLA in liquidation might seem like an insurmountable obstacle at the time, liquidators are pragmatic and bound to return the best value to creditors. As a result, you might be able to negotiate a settlement lower than the total debt. 

  • Statement of Means: By providing the liquidator with a “Statement of Means” detailing your assets, income and liabilities, you can prove your inability to pay the full amount.
  • Commercial Settlements: Liquidators may accept a reduced lump sum to avoid the costs of litigation. There are documented cases when DLAs have been settled for significantly less than the face value, especially when the director evidenced limited means.

A Directors’ Loan Account is a bit like a parachute. Used correctly during regular solvent trading, it provides flexibility and utility. But if the plan enters the turbulence of insolvency then a poorly packed parachute – one that is overdrawn, undocumented or retroactively altered – will not just fail to save you but will actively drag you down into further financial peril. 

An overdrawn DLA isn’t just another loose end; it’s a meticulously regulated debt instrument with higher tax penalties and lower reporting thresholds than ever before.

So if you are currently facing one or suspect it could happen to you this year, get in touch for a free initial conversation. 

We’ll talk you through all the options available to you and what your next steps should be to protect your personal finances and those of your business.