Kevin Read outlines an upcoming increase in the tax charge under the ‘loans to participators’ provisions for companies.
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There is a corporation tax (CT) charge (CTA 2010, s 455) on loans made to ‘participators’ in close companies that are outstanding at the end of a CT accounting period (CTAP).
This charge used to be at a fixed rate, which Chancellors changed from time to time. However, some years ago George Osbourne altered this principle (in FA 2016, s 50), instead setting the rate at ‘such percentage of the amount of the loan or advance as corresponds to the dividend upper rate specified in section 8(2) of ITA 2007 for the tax year in which the loan or advance is made’.
Change in dividend tax rates
In the November 2025 Budget, Rachel Reeves announced that dividend tax rates for basic and higher rate taxpayers would both rise by two percentage points from 6 April 2026, to 10.75% and 35.75% respectively.
Due to the increase in the latter (the dividend upper rate), section 455 tax on loans advanced from 6 April 2026 is automatically increased to 35.75% (from 33.75%).
Clearing overdrawn loan accounts
Section 455 tax is payable nine months and one day from the end of the CTAP. However, to the extent the loan is repaid (typically by declaring a dividend) or written off by the company before the payment date, no section 455 tax will be payable, as relief is due (under CTA 2010, s 458).
With the upcoming section 455 rate increase, if partial repayments of loans to director-shareholders are made, it will be very important to specify which loan or loans are being repaid.
Example: Debbie partially repays her loan
Debbie owns 100% of her company, which has a June year end. At 30 June 2026, she has an overdrawn directors’ loan account (DLA) of £40,000, which has arisen as follows:
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loans from 1 July 2025 to 5 April 2026: £25,000, which would attract section 455 tax at 33.75%; and
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loans from 6 April to 30 June 2026: £15,000, which would attract section 455 tax at 35.75%.
The parties may choose which of the loans any repayment should be set against and should clearly document their intentions (e.g., by an email from Debbie to the company).
If a partial repayment of £27,000 is made in March 2027, this should be allocated:
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firstly, against the post-5 April 2026 loans; and
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then, against £12,000 of the rest of the loans.
This would leave £13,000 of the pre-6 April loans outstanding, producing a section 455 tax charge at 33.75% of £4,388, payable on 1 April 2027.
If no formal allocation is made by the director or the company, HMRC would normally apply the “rule in Clayton’s case” (see HMRC’s Employment Income Manual at EIM26261) and allocate repayments against the oldest outstanding borrowing. Although this normally works in the taxpayer’s favour (by assuming, for example, that loans that were outstanding at the last year end are paid off before more recent loans, which would not yet trigger a section 455 tax charge), it would not be the case in our example.
For Debbie, if the earlier loans were deemed paid off first, it would mean that £13,000 of the post-5 April 2026 loans are left unpaid. These would suffer a section 455 tax charge at 35.75%, giving tax payable of £4,648.
Reclaiming section 455 tax previously paid
This can be done online using form L2P. However, repayment will not be made until, at the earliest, nine months and one day after the end of the CTAP in which the loan was repaid or written off.
Practical tip
There are a number of tax traps involving directors’ loans. Make sure you are aware of all the income tax, National Insurance contributions and corporation tax issues, as they often catch out the unwary.
