An outstanding loan from a close company can trigger a tax charge under Section 455 of the Corporation Tax Act 2010 where it is made to a shareholder (or other participator) or to a person connected with them.
The director’s loan account is generally used to record temporary withdrawals from the business for personal spending. However, the Section 455 charge does not apply simply because the borrower is a director.
It generally applies where the loan is made by a close company to a shareholder or other participator, or to a person connected with them. In many owner-managed companies the directors are also the shareholders, so the rules often apply in practice, but that is not always the case. If a loan within these rules is not repaid within nine months and one day after the company’s year end, the company must pay the tax charge known as the s455 charge. This is intended 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 borrower, but it is usually temporary. If the relevant loan is repaid, released or written off the company can claim a refund of the charge from HMRC, provided the loan was one to which the s455 rules applied in the first place. However, writing off a director’s loan can still 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 s455 charge. These rules are relevant only where the s455 regime applies, which will generally be where the borrower is a shareholder or other participator, or a person connected with them, rather than a director who is not a shareholder.
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.
