In this excerpt from the report 'Personal Companies – Tips and Traps', Sarah Bradford explains the section 455 charge on overdrawn director's loan accounts in close companies, covering when the tax arises, how it can be avoided or reclaimed, and the tax and National Insurance implications of the different ways to clear a loan.
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Special rules apply where loans are made to participators in a close company. Broadly, a close company is a company that is under the control of five or fewer participators or any number of participators if those participators are directors or if, in the event of a winding-up, more than half the assets would be distributed to five or fewer participators or to participators who are directors. A personal company with a sole shareholder who is also a director is a close company.
Where a loan to the director/shareholder of a personal company remains outstanding at the corporation tax due date nine months and one day after the end of the accounting period, a tax charge arises on the company – the section 455 charge. The rate of section 455 tax is aligned with the dividend upper rate (set at 35.75% from 6 April 2026 onwards) and is applied to the outstanding loan balance. Although section 455 tax is paid with the company’s corporation tax for the accounting period, crucially it is not corporation tax.
Once section 455 tax has been paid on an outstanding loan, no further section 455 tax is due if it remains outstanding at the corporation tax due date for the following accounting period.
Unlike most taxes, section 455 tax is a temporary tax. If the loan is repaid, the associated section 455 tax becomes repayable nine months and one day after the end of the accounting period in which the loan is repaid.
Tip
Repaying the loan before the corporation tax due date will prevent a section 455 tax charge from arising.
Tip
Clearing the loan after the section 455 tax has been paid will trigger a repayment of that tax.
Tip
It is important to keep track of when loans are made and when they are repaid to ensure that the section 455 tax is properly paid and reclaimed.
Trap
Failure to clear an outstanding loan balance on a director’s account before the corporation tax due date will trigger a section 455 tax charge on the company of 35.75% of the loan balance (loans made on or after 6 April 2026).
Avoiding a Section 455 Charge
The section 455 charge will not apply if the overdrawn balance on the director’s loan account is cleared before the corporation tax due date nine months and one day after the end of the accounting period. If the director’s account is overdrawn at the end of the accounting period but cleared before the corporation due date, there is no section 455 tax to pay, but the loan must be reported to HMRC on the CT600A filed with the company tax return.
There are various ways in which an outstanding loan account balance can be cleared, including:
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Introducing funds;
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Crediting a salary or bonus payment to the director’s loan account;
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Declaring a dividend and crediting it to the director’s loan account; or
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Writing the loan off.
Apart from the first option (introducing funds), the other methods for clearing the loan will have associated tax implications and, with the exception of declaring a dividend, National Insurance implications.
Where additional salary or a bonus is paid, this will be taxable in the hands of the director. The director will also be liable for employee’s Class 1 National Insurance, and the company will be liable for employer’s Class 1 National Insurance.
Where a dividend is declared to clear the loan, unless the dividend allowance (or unused personal allowance) remain available to shelter the dividend, the recipient will pay tax on the dividend at the appropriate dividend rate of tax.
Consequently, the bonus or dividend that is needed to clear the loan will be more than the outstanding loan balance to provide sufficient funds both to clear the loan and to pay the associated tax and, in the case of a bonus, the National Insurance.
Rather than clearing the loan, it may be tempting to write it off. However, this too has tax and National Insurance implications. Where a loan is written off, the amount written off is treated like a dividend for tax purposes and taxed at the dividend rates of tax. However, unlike an actual dividend, it is liable for Class 1 (employee’s and employer’s) National Insurance.
From the company’s perspective, the amount written off is not deductible in computing the company’s profits chargeable to corporation tax. This is because it is treated as a distribution.
Tip
Where the director has funds available outside the company, using these is the best option for clearing the loan to avoid a section 455 charge.
Tip
Clearing the loan will not always be the best option. If the tax and National Insurance hit on the dividend or bonus paid to clear a loan is more than the section 455 tax, it is better to leave the loan outstanding with a view to clearing it at a later date when this can be done more cheaply from a tax and National Insurance perspective.
Tip
If the director has had more than one loan, first clear those on which the rate of section 455 tax is the highest, either to avoid a charge or to generate a higher repayment. For example, it is better to clear a loan made on or after 6 April 2026 where the section 455 tax is 35.75% than one made before that date where the rate of tax was 33.75%.
Trap
Anti-avoidance rules exist to prevent a director from clearing a loan shortly before the section 455 trigger date only to reborrow the funds shortly afterwards. Here the repayment is ineffective.
Trap
Writing off the loan is not a good idea as this has unfavourable tax consequences for both the director and the company.
