(For Education Sector Limited Companies)
“I didn’t realise that counted as a loan…”
This is one of the most common moments of silence we see in meetings with education business directors.
A nursery owner.
A private training provider.
A director of an online education company.
They’re reviewing their accounts for the year, and somewhere in the paperwork is a figure they don’t recognise:
Director’s Loan Account: £18,400 (overdrawn)
They pause, then say:
“But that’s just money I took out when things were tight…
I didn’t think that was a loan.”
They didn’t do anything reckless.
They didn’t intend to bend the rules.
They were simply running an education business — and trying to make it work.
At Accounting Matters, this moment is rarely about blame.
It’s about understanding how Director’s Loan Accounts (DLAs) quietly form — and why they become dangerous when they’re ignored.
Why Director’s Loan Accounts are so common in education businesses
Education-sector limited companies are particularly prone to Director’s Loan Account issues, and there are good reasons for that.
Education businesses often have:
- Irregular or term-based income
- Funding delays
- High fixed staff costs
- Directors who prioritise learners and staff over themselves
- Directors who “top up” personal income only when needed
This leads to a very common pattern:
“I’ll just take a bit now and sort it later.”
And that’s exactly how a Director’s Loan Account begins.
What is a Director’s Loan Account?
A Director’s Loan Account is simply a record of money:
- The director puts into the company, or
- The director takes out of the company that isn’t salary or dividends
It’s not inherently bad.
In fact, it can be useful.
The problem isn’t the existence of a DLA — it’s not knowing what’s happening to it.
When a Director’s Loan Account is absolutely fine
Let’s start with the positive.
Director’s Loan Accounts work well when:
- A director temporarily funds the business
- Short-term drawings are repaid quickly
- Cashflow timing issues are smoothed responsibly
- Records are kept accurately and reviewed regularly
In education businesses, this often happens when:
- A director injects funds to cover a funding delay
- Personal money bridges a quiet summer period
- A one-off expense needs covering
In these cases, the DLA is doing its job.
The issue is that most DLAs don’t stay small and intentional.
How DLAs quietly turn dangerous in education companies
Unlike other tax problems, Director’s Loan Accounts rarely explode overnight.
They creep.
A personal bill paid from the business account.
A transfer to cover a quiet month.
A delayed dividend.
A missed salary review.
Each decision feels reasonable at the time.
But slowly:
- The loan balance grows
- No one tracks it properly
- The director forgets it’s there
Until the year-end accounts arrive.
The education-sector DLA creep (a familiar story)
We see this pattern repeatedly:
- Director reduces salary during quiet months
- Dividends feel risky due to cashflow
- Director takes small, informal drawings instead
- Business grows, pressure increases
- Loan balance quietly builds
- Accounts prepared — problem revealed
By this point, the issue feels sudden.
But it wasn’t sudden.
It was unmanaged.
Why HMRC cares about Director’s Loan Accounts
HMRC views overdrawn Director’s Loan Accounts as:
“The company lending money to the director.”
That brings tax consequences — even when the director had no idea they were borrowing.
And those consequences can be significant.
The three main tax dangers education directors face
1. Section 455 Corporation Tax
If a director’s loan is still overdrawn 9 months after the year-end, the company must pay additional Corporation Tax (known as s455 tax).
Key points:
- It’s charged at a high rate
- It hits the company’s cashflow
- It’s refundable — but only when the loan is repaid
- It often arrives at the worst possible time
For education businesses already juggling VAT, payroll, and reinvestment, this can feel like a punishment for simply surviving.
2. Benefit-in-Kind tax
If the loan exceeds certain thresholds:
- HMRC may treat it as a benefit
- Personal tax can arise for the director
- Interest calculations come into play
This surprises many education directors who thought:
“It’s my company — how can this be a benefit?”
But legally, the company and the director are separate.
3. Illegal dividends hiding inside DLAs
This is one of the most serious issues we see.
When:
- Profits don’t exist
- Dividends are still taken
- Cash is available but profit isn’t
HMRC can argue:
- The dividend was illegal
- The money should be treated as a loan
- Or worse — reclassified for tax purposes
This often leads to:
- Unexpected personal tax
- Loss of trust in the numbers
- Stress and confusion
Why education directors are hit harder emotionally
DLAs don’t just cause tax issues.
They create personal stress.
We often hear:
“I was just trying to keep the business going.”
“I didn’t want to worry staff.”
“I thought I’d sort it once things settled.”
Education directors carry a strong sense of responsibility — to learners, parents, staff, and outcomes.
But that responsibility shouldn’t result in personal financial risk.
The link between DLAs, director pay, and cashflow
Director’s Loan Accounts don’t exist in isolation.
They are usually a symptom of:
- Unclear director pay strategy
- Poor cashflow visibility
- Lack of regular financial review
DLAs appear when:
- Salary hasn’t been reviewed
- Dividends aren’t planned
- Cashflow isn’t forecast
They’re a warning light — not the root cause.
How to keep Director’s Loan Accounts under control
Healthy education businesses tend to:
- Plan director pay intentionally
- Separate personal and business spending clearly
- Review DLA balances regularly
- Repay loans proactively
- Use management accounts, not guesswork
The goal isn’t restriction.
It’s clarity.
How Accounting Matters helps education directors avoid DLA problems
We don’t wait until year-end to have these conversations.
We help by:
- Explaining DLAs in plain English
- Monitoring balances during the year
- Linking drawings to profits and cash
- Planning repayments sensibly
- Reducing personal risk for directors
Most DLA issues are completely preventable — once they’re understood.
A moment of relief we often see
There’s usually a point in these conversations where directors relax.
They realise:
- They’re not alone
- They haven’t “failed”
- The issue is fixable
With visibility and planning, DLAs stop being scary numbers and start being manageable tools.
A final thought for education-sector directors
Director’s Loan Accounts are not a sign of bad management.
They’re a sign of pressure without planning.
Handled well, they’re temporary and harmless.
Ignored, they become expensive and stressful.
The difference is understanding — and acting early.
Where this trilogy leaves you
Together, these three blogs explain:
- How you should pay yourself
- Why cash feels tighter than profit suggests
- Where risk quietly builds if things aren’t planned
If any of this feels familiar, you’re not behind.
You’re simply at the point where your education business needs structure, visibility, and proactive support — not just year-end accounts.