7 Proven Ways to Write Off Directors Loan Accounts

The process to write off directors’ loan accounts (DLAs) is rarely straightforward. If your company is facing financial difficulty with an overdrawn account, understanding your options before a liquidator becomes involved can save you from a range of possible consequences including personal bankruptcy, director disqualification, or losing your home. 

This guide explains when writing off a directors loan account is possible, the significant tax implications (including National Insurance charges many directors don’t expect), and crucially, what happens to your  account if your company enters liquidation. 

Whether your directors loan account is in credit or overdrawn, if you’re considering a write-off, or exploring alternatives, this article is for you. It provides all the insolvency practitioner insights you’ll need to make informed decisions and protect your personal position.

First published December 2023. Last updated September 2026.

What is a Directors’ Loan Account Write Off?

A directors’ loan account write off is a legal process through which a business formally acknowledges that a loan owed to (or from) a director cannot be repaid and will, therefore, be written off as bad debt. Writing off will typically involve recording the outstanding loan as an expense on the balance sheet, thereby reducing the company’s net assets. 

It’s important to note that the DLA write off amount should be included in the directors’ self assessment tax returns under the ‘additional information’ pages. From an income tax perspective, the written-off loan is treated as a dividend, which may result in some liability for the director. It’s also crucial that you be aware that the company will be unable to claim any corporation tax relief on the write off amount. 

Writing off a director’s loan account should be properly documented, and approval by shareholder resolution is the safer route. Do not assume, though, that the absence of paperwork means no write-off has happened. In HMRC v Quillan [2026] UKUT 00300 (TCC), the Upper Tribunal held that a write-off is a matter of substance rather than form, and that no formal process is required for the tax charge to apply.

Which Scenarios Make Writing Off a Directors Loan Accounts Possible?

Important: Writing off a directors loan account should typically be considered a last resort due to the significant tax implications, particularly regarding National Insurance charges. In most circumstances, repaying an overdrawn loan through cash, dividends, or salary is considerably more tax-efficient than writing it off.

A write-off becomes appropriate only when repayment is genuinely impossible or impractical. The most common scenario is when insolvency (for either the company or the director) renders the loan unrecoverable. Additionally, writing off a DLA can be mandated by the courts, following a director’s departure or death, or by mutual agreement for specific tax planning purposes.

Critical tax consideration: When a directors loan account is written off, the amount triggers Class 1 National Insurance Contributions for both the company (employer NIC at 15%) and the director (employee NIC). This is in addition to the income tax charge on the director, making write-offs significantly more expensive than dividend treatment alone. To mitigate NIC charges, the write-off should be approved via shareholder resolution at a general meeting rather than by director decision, with proper documentation maintained.

Liquidation warning: Even if a directors loan account is formally written off, a liquidator can challenge the write-off if the company later enters insolvency, and may be able to recover the amount from the director. This means write-offs don’t necessarily protect directors from future claims if the business subsequently fails.

The most common scenarios where a directors’ loan account debt will be forgiven are:

• Director Insolvency: If a director becomes insolvent while owing the company money, it can quickly become evident to all parties that they will no longer be able to repay the debt. In this scenario, the business may agree to write off the directors’ loan account.
• Company Insolvency: When a company is in the process of liquidation/winding up operations, outstanding directors’ loans may not be repayable due to insufficient funds. These loans may be written off as part of the formal process of liquidation.
• Court Order: In some scenarios, the court may issue an order forcing the writing off of a DLA. This typically happens when it is deemed to be a necessary part of the firm’s insolvency proceedings.
• Director Resignation/Death: When a director of a business resigns or passes away, the company may determine that the loan owed from (or to) that director is either unlikely or unable to be repaid, potentially leading them to choose to write it off.
• Mutual Agreement in Place: Likely the rarest scenario to write off a directors’ loan account. There can be a mutual agreement in place between a company and the directors stating that loans will be written off.

What Happens When Your Directors Loan Account Is In Credit?

When a directors loan account is in credit, it means the company owes money to the director. This situation arises when a director has lent personal funds to the company: either as a one-time cash injection to support business operations, or through cumulative transactions over the accounting period where money paid into the company exceeds money withdrawn.

A director can withdraw a credit balance from their loan account at any time without triggering income tax or National Insurance implications. The withdrawal is simply a repayment of money already lent to the company, making it a tax-efficient way to extract funds compared to salary or dividends.

Directors also have the option to charge the company interest on any credit balance. While there are no official rules mandating specific interest rates, companies must pay a commercial market rate to claim corporation tax relief on the interest expense. The company is required to file a CT61 form with HMRC and withhold basic rate tax (20%) each time interest is paid to the director.

For directors who already receive dividend income and maintain a low salary, interest payments can be tax-efficient. Basic rate taxpayers can earn up to £1,000 in savings income at 0% tax, while higher rate taxpayers have a £500 allowance. Any interest received must be declared on the director’s self-assessment tax return.

What Happens to Credit Balances in Liquidation?

If a company enters liquidation while owing money to a director, that director becomes an unsecured creditor of the company. The credit balance ranks alongside other unsecured creditors (such as suppliers and HMRC) for repayment from available assets. 

In many insolvencies, unsecured creditors receive only a fraction of what they’re owed, and sometimes nothing at all. Directors should be aware that lending significant personal funds to a struggling company carries the risk of not being repaid if the business ultimately fails.

Directors Loan Account Write Off: 7 Tips

Managing a potential directors’ loan account write off is an important aspect of corporate financial management, one that is often undertaken in ‘crisis situations’ of insolvency, financial distress, change in leadership, etc. This process demands careful planning and compliance with requirements. 

Factors to consider when navigating loan account write offs effectively include: 

Seek Professional Advice as Soon as Possible 

When faced with the need for a directors’ loan account write off, it’s imperative that you seek professional guidance immediately. Engaging an insolvency expert or alternative legal advisor is crucial to navigate the intricate landscape of insolvency law. 

Experts in the subject will be able to provide you with invaluable insights, knowledge, and experience tailored to your situation. This should help  to ensure that you adhere to the proper process and do not inadvertently violate any legal requirements that might leave you personally vulnerable. 

Their expertise will also help you to make well-informed decisions when it comes to your DLA writeoff — ensuring you stay on the right course from the outset and throughout.

Document Any and All Transactions

Maintaining meticulous and comprehensive records of financial transactions with regards to the directors’ loan account is a vital foundational step towards writing off. 

Every single transaction involving a loan from the company to the director (or vice versa), must be documented. These records will in turn serve as a critical source of evidence to support the transparency and legality of the process. 

Ultimately, the more accurate and comprehensive your documentation is, the more credible your financial reporting becomes. 

Assess the Firm’s Financial Position 

Before beginning the DLA write off process, it is essential that you conduct a thorough assessment of the company in question’s financial situation. 

While insolvency is the most common cause of a write off, it is important to consider alternative solutions that could help bring the business back from the brink. Primary methods include: 

• Business recovery 
• Corporate restructuring 
• Negotiate with creditors
• Administration 

Consider a comprehensive evaluation of the financial health of your company and make sure that writing off a directors’ loan account is the most appropriate course of action given the circumstances of the business. 

Don’t Forget About Creditors 

While the need to write off a directors’ loan account will often be driven by a company’s financial issues, it is paramount that you consider the interests of the business’s creditors. Creditors often have a significant stake in a financially struggling firm, and their consent/approval may be required during the insolvency process. 

Writing off a directors’ loan account should always be done in a manner that totally aligns with the best interests of all stakeholders, including anybody to whom the company in question owes money.

Ensure Legal Compliance 

Compliance with legal and regulatory requirements should be viewed as a non-negotiable aspect of the DLA write off process. This should cover all insolvency laws and any other relevant regulations. 

Failing to comply can lead to legal challenges, financial penalties, or even the potential for personal liability. To avoid these outcomes, make sure that you have a clear and comprehensive understanding of the legal process surrounding directors’ loan account write-offs in your specific region and industry. 

Consider All Tax Implications

Another key aspect in the write off process is to understand the potential tax implications for all parties involved. Writing off a directors’ loan account can have tax implications that could affect both the company’s financial position and the directors own tax liability. 

Navigating these complexities effectively will usually require the assistance of a qualified tax expert, somebody who will be able to provide  guidance on managing the tax aspects of the write off. 

Be Transparent and Accountable 

Transparency and accountability are central to the DLA write off process. Maintaining transparency ensures that all stakeholders, including creditors, regulators, and shareholders, can understand and verify the legitimacy of the write off. 

Transparency and accountability not only build trust between parties, they can also protect the company and directors from potential legal and financial troubles that can arise if the process is not completed properly. 

Frequently Asked Questions About Writing Off Directors Loan Accounts

We understand that the process to write off directors’ loan accounts can feel complex. If you still have questions, you won’t be alone, as even experienced directors sometimes find the topic confusing. To help, we’ve put together a list of frequently asked questions which address the most common concerns.

What is a Directors Loan Account? 

The purpose of a directors’ loan account is to track the money a director has borrowed from, or lends to, their company. It will include transactions such as personal expenses paid by the company or any cash withdrawals made from company coffers. Proper management is essential to avoid potential tax issues or personal liability. 

What are the Tax Implications When You Write Off a Directors Loan Account? 

When a directors’ loan account is written off, the director pays income tax on the amount at dividend rates, and where the director is also an employee, Class 1 National Insurance is due from both the director and the company. The company cannot deduct the write-off for corporation tax. Always consult with an expert if you want to understand the specific implications of your circumstances. 

What Happens if a Directors Loan Account Isn’t Repaid? 

If directors’ loan accounts are not repaid, they may be left facing personal liability, legal action, or even disqualification. The company may also owe section 455 tax on the outstanding balance, and a loan over £10,000 can create a taxable benefit in kind for the director. This could lead to additional penalties or interest being added.

Can a Directors Loan Account Be Written Off if the Company is Insolvent?

If the company is insolvent, writing off a directors loan account becomes significantly more complex and is generally not advisable. When a company cannot pay its debts, the overdrawn loan account is treated as an asset that belongs to the company’s creditors, not something the company is free to write off.

An insolvency practitioner (whether acting as liquidator, administrator, or advisor) will assess whether the loan is recoverable and has a duty to pursue it for the benefit of creditors. Writing off the loan while the company is insolvent, or immediately before insolvency, can be challenged as a transaction at undervalue or preference, potentially resulting in the write-off being reversed.

Directors should also be aware that writing off a loan won’t prevent personal liability if the company subsequently enters formal insolvency. The liquidator retains the right to pursue the director for repayment of amounts withdrawn, regardless of any write-off that occurred.

If your company is insolvent and you have an overdrawn  account, it’s imperative that you seek professional advice from a licensed insolvency practitioner immediately to understand your options and potential exposure.

What happens to my overdrawn Directors Loan Account if the company goes into liquidation?

If a company enters liquidation with an overdrawn account, the liquidator has a legal duty to pursue repayment as the outstanding loan represents an asset that belongs to the company’s creditors.

The liquidator’s process typically involves:

• Requesting immediate repayment from the director.
• Assessing the director’s personal financial position and ability to repay.
• Negotiating payment plans or partial settlements where appropriate.
• Taking legal action if necessary, which can result in County Court Judgments (CCJs) or bankruptcy proceedings against the director.

Important points that directors must understand:

The overdrawn balance cannot automatically be offset against money the company owes the director (such as unpaid salary or a credit loan account balance) unless explicitly agreed in advance. Each claim is treated separately in the liquidation process.

Directors who cannot repay face serious consequences including personal insolvency (through an Individual Voluntary Arrangement or bankruptcy), which can last up to six years and severely impact credit ratings and future business activities.

Taking additional drawings from the company when it’s already insolvent can lead to director disqualification proceedings, typically lasting 2-15 years.

Overdrawn accounts are one of the most common issues liquidators encounter. If your company is facing financial difficulty and you have an overdrawn DLA, seeking prompt advice from a licensed insolvency practitioner can help you understand your options and potential exposure before formal insolvency proceedings begin.

Can a liquidator’s decision not to chase your loan create a personal tax bill?

Yes. If a liquidator concludes that an overdrawn loan account cannot be recovered and records that in the final account, the unpaid balance can be treated as written off, and the director is then charged to income tax personally on that amount under section 415 ITTOIA 2005.

The mechanism runs in two stages. When the company lends to a participator, section 455 CTA 2010 charges the company a temporary corporation tax charge. If the loan is written off rather than repaid, section 415 moves the liability to the director as income tax. The write-off does not clear the debt, it transfers who pays tax on it.

This was settled in HMRC v Quillan [2026] UKUT 00300 (TCC). A director owed his company £439,954, agreed a settlement with the liquidator and paid £57,498. The liquidator’s final report recorded that no further funds were expected. HMRC treated the remaining £382,456 as written off in that tax year and the Upper Tribunal agreed, even though the liquidator later said the balance had not been formally written off.

Two points matter for directors. Settling part of an overdrawn loan account does not deal with the rest, and the balance can still land as personal income tax. And the tax charge does not depend on the liquidator using the words “written off”, so you cannot rely on the absence of a formal write-off as protection.

How Should I record a Write Off in a Directors Loan Account?

To record a write off of a directors’ loan account, debit the account and credit the company profit and loss account. This will accurately reflect the ‘loss’ in the business’s financial statements. Consider consulting with your accountant to ensure full compliance with accounting standards before committing down one path. 

Are There Alternatives to Writing Off a Directors Loan Account? 

Yes, and in most cases, these alternatives are significantly more tax-efficient than writing off the loan. Directors should explore all repayment options before considering a write-off.

Option 1. Direct Cash Repayment: The simplest approach is repaying the loan directly from personal funds. This carries no tax implications for either the director or company. The loan must be repaid within nine months and one day of the company’s year-end to avoid Section 455 corporation tax charges (35.75% for loans made from 6 April 2026, or 33.75% for loans made between 6 April 2022 and 5 April 2026)

Option 2. Declare a Dividend to Clear the Balance: If the company has sufficient distributable reserves (retained profits), directors can declare a dividend and credit it to their loan account rather than taking the cash. This clears the overdrawn balance while only incurring dividend tax (10.75%, 35.75%, or 39.35% depending on the director’s tax bracket, from 6 April 2026). This avoids the National Insurance charges that arise from write-offs, making it considerably cheaper overall.

Option 3. Credit Salary Through Payroll: Directors can pay themselves a higher salary through PAYE and credit the net amount to the loan account. While this incurs income tax and NIC, it’s often preferable to a write-off and creates a legitimate business expense for corporation tax purposes.

Option 4. Negotiate a Formal Repayment Plan: If immediate repayment isn’t possible, directors can negotiate a structured repayment plan with the company, documenting agreed instalments and timeframes.

If the company is insolvent, or the director personally cannot afford repayment, these alternatives may not be practical. In such cases, seek advice from a licensed insolvency practitioner immediately. They can assess whether formal procedures (such as liquidation or administration) are inevitable and help you understand the implications for your overdrawn loan account before liquidators become involved.

Each option carries different tax and legal implications. Professional advice is essential to choose the most appropriate solution for your circumstances.

Don’t Navigate Directors Loan Account Write Offs Alone

The process to write off directors’ loan accounts is multifaceted and requires careful planning. You’re required to maintain meticulous documentation and attention to detail, alongside rigorous compliance with all legal standards and regulations. 

At Inquesta, we specialise in simplifying these complexities and the nuances involved in DLA write offs. Our team of insolvency professionals are on-hand to guide you through this challenging terrain, ensuring that you follow the correct procedures and avoid any unexpected legal pitfalls.  

We can offer you all the insights, knowledge, and experience you’ll need to make well-informed decisions when it comes to the write off process. Whether you find yourself fighting off insolvency or you’re considering a change in leadership, our experts can steer you in the right direction. 

Need help managing your directors’ loan account? Contact Inquesta today for expert advice.