An outstanding loan to a director or shareholder from a close company can trigger a tax charge under Section 455 of the Corporation Tax Act 2010.
The director’s loan account is generally used to account for temporary withdrawals from the business for the director’s personal spending. However if the director does not pay the company back within nine months and one day after the company’s year end, the company must pay a corporation tax charge known as the s455 charge. This is to prevent owner-managed companies from extracting profits in the form of loans instead of taxable dividends or salary.
For several years the charge has been calculated as 33.75% of the amount outstanding, matching the higher dividend tax rate. Following changes announced in the 2025 Budget the dividend higher rate, and therefore the s455 rate, increased to 35.75% for loans made on or after 6 April 2026.
The s455 charge is paid by the company, not the individual director, but it is usually temporary. If the loan is repaid, released or written off the company can claim a refund of the charge from HMRC. However, writing off a director’s loan can have tax implications for the individual.
Where the director is also a shareholder, the write-off is usually taxable as a dividend. The company cannot claim corporation tax relief on the amount written off and the director must report the deemed dividend on their self assessment tax return. If the director is not a shareholder, the write-off is normally treated as employment income subject to PAYE income tax and Class 1 national insurance contributions.
HMRC anti-avoidance rules prevent ‘bed and breakfasting’ where loans are repaid and immediately redrawn simply to avoid the charge.
If a loan to a director exceeds £10,000 at any point in the tax year it will be treated as a beneficial loan and additional tax rules will apply. If no interest is charged, or interest is below HMRC’s official rate of interest, the difference will be taxable on the director as a benefit-in-kind. The company will also have to pay Class 1A national insurance on the taxable benefit.
With the higher rate now in force for newer loans, it is important to monitor directors’ loan accounts closely and maintain accurate records of repayments and balances.
