The following article is one of the tips from the newly released guide 101 Business Tax Tips 2026/27 edition. Save 40% today.
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Beware of the special rules that apply where a loan to a participator in a close company is written off. Most family companies are close companies, and the rules will bite when writing off an overdrawn balance on a director’s loan account. However, where there are no retained profits, writing off a loan can be preferable to making a salary or bonus payment.
For income tax purposes, the amount written off is treated as a distribution (like a dividend). If the dividend allowance is available (set at £500 for 2026/27), the first £500 of the dividend is tax-free (being taxed at the zero rate). Thereafter, it is taxed (2026/27 rates) at, respectively, 10.75%, 35.75% and 39.35% to the extent that it falls within the basic, higher and additional rate bands. As the dividend tax rates are less than the rates payable on a payment of a salary, writing off a loan where it is not possible to pay a dividend will trigger a lower tax bill than making an equivalent bonus payment to clear the loan.
However, unlike a dividend, NIC is payable on a loan written off. For 2026/27, this will cost the director 8% or 2% depending on whether his or her income exceeds the upper earnings limit and will cost the company 15%.
From the director’s perspective, the tax and National Insurance implications of writing off a loan are a hybrid of the dividend and salary treatments – tax applies as for a dividend and National Insurance applies as for a salary or bonus payment.
However, there is a sting in the tail – no corporation tax deduction is available for the loan written off.
Depending on the tax and NIC position of the director, rather than writing the loan off, it may be preferable to leave it outstanding as, once the NIC charge is taken into account, it may be cheaper to pay the section 455 tax charge on the outstanding loan, particularly as this is recovered if the loan is eventually repaid.
Where the loan is written off in the capacity of a shareholder rather than as an employee, strictly speaking NIC should not be due. However, this is a tricky area and professional advice should be sought.
Loans Written Off
Jenny has a loan of £20,000 from her family company, in which she is director and shareholder. The loan was taken out in 2019. The company is considering writing off the loan.
It is assumed that the National Insurance employment allowance is not available to set against any employer’s National Insurance that may arise.
If the loan is written off in 2026/27, she will be treated as receiving a dividend of £20,000. If it is assumed that she has received a salary equal to her personal allowance, but has no other income, the first £500 of the dividend is tax-free as it is covered by her dividend allowance.
The remaining £19,500 is taxed at 10.75%, generating a tax bill of £2,096.25 (£19,500 @ 10.75%). She will also pay NIC at 8% on the amount written off (£1,600, being 8% of £20,000). The company will pay NIC of £3,000 (15% of £20,000). The tax and NIC cost of the write-off is therefore £6,696.25.
However, if she has a salary of £55,000 and is a higher rate taxpayer, she will still receive the first £500 of the dividend tax-free (as it is covered by her dividend allowance), but the remaining £19,500 is taxed at the dividend higher rate of 35.75%, generating a tax bill £6,971.25.
She will also pay National Insurance of £400 (£20,000 @ 2%) and the company will pay NIC of £3,000 (£20,000 @ 15%).
The total tax and NIC cost of the write-off is £10,371.25.
The company paid section 455 tax nine months and one day after the end of the accounting period in which the loan was made. However, if the loan is left outstanding, the company will have no further tax to pay but will not receive a refund of the section 455 tax.
If any part of the loan is subsequently repaid or written off, the associated section 455 tax can be recovered.
