Section 455 tax is a temporary tax charged on a close company when a director or shareholder owes it money at the end of the accounting period and the loan is not repaid within nine months. Most owner-managed companies are close companies.
The rate is 33.75 percent for loans made before 6 April 2026 and 35.75 percent for loans made on or after that date. The tax is refunded once the loan is repaid, but it can tie up a significant amount of cash in the meantime.
How it arises
A director's loan account records money flowing between you and your company. If you take out more than you put in, and the withdrawals are not salary or dividends, you owe the company money. This is often called an overdrawn director's loan account.
The rules apply to loans to participators, which in practice means shareholders and their associates, such as family members.
When it is due and refunded
Section 455 tax is due nine months and one day after the end of the accounting period, the same date as corporation tax. If the loan is repaid before that date, no section 455 tax is payable.
If the tax has been paid, HMRC refunds it nine months after the end of the accounting period in which the loan is repaid or written off. Depending on when the repayment happens, that can mean waiting well over a year for the money back.
A worked example
A company has a year end of 31 December 2026. During 2026, its director draws £40,000 more than she is entitled to, all after 6 April 2026. The balance is still outstanding on 1 October 2027.
- Section 455 tax at 35.75 percent: £14,300
- Due date: 1 October 2027
If she repays the loan in March 2028, during the year ending 31 December 2028, the company can reclaim the £14,300 from 1 October 2029. Had she repaid it before 1 October 2027, there would have been no charge.
Bed and breakfasting
Repaying the loan just before the deadline and drawing it out again shortly afterwards does not work. Anti-avoidance rules ignore a repayment where:
- £5,000 or more is repaid and £5,000 or more is borrowed again within 30 days, or
- The loan is £15,000 or more and, at the time of repayment, there are arrangements or an intention to redraw.
These rules do not apply where the repayment is made by declaring a dividend or bonus that is taxed on the director, because that creates real income.
Benefit in kind
Separately, if a director's loan exceeds £10,000 at any point in the tax year and interest is charged at less than the official rate, there is a taxable benefit in kind. The official rate is 3.75 percent for 2025/26 and 2026/27.
In the example above, if the £40,000 is outstanding interest free for the whole of 2026/27, the benefit is £1,500. For a higher rate taxpayer that is £600 of income tax, plus £225 of Class 1A National Insurance for the company. Charging interest at the official rate avoids the benefit, although the interest is taxable income for the company.
Writing off a loan
If the company writes off the loan, the section 455 tax becomes reclaimable, but the amount written off is taxed on the shareholder as a distribution, at dividend rates. For 2026/27 these are 10.75 percent, 35.75 percent and 39.35 percent. National Insurance can also apply where the borrower is an employee or director. A write-off is rarely the cheapest option.
Clearing the loan
The usual ways to clear an overdrawn account are:
- Repaying it from personal funds.
- Declaring a dividend, provided the company has enough distributable profits.
- Paying a bonus through payroll, which is deductible for the company but attracts income tax and National Insurance.
The right mix depends on your income for the year, the company's profits and how much cash you need.
What to do
- Review your director's loan account before your year end, not after.
- Plan how to clear any overdrawn balance within nine months of the year end.
- Avoid drawing money just to repay it and redraw it.
- Keep the balance under £10,000 if you want to avoid a benefit in kind, or charge interest.
If your loan account is overdrawn and you would like help with the options, book a free call.
