Directors loan accounts – Avoid the unexpected tax trap

Company owners often withdraw monies from their business that is not salary or dividends, this borrowing can be useful but if it is not managed properly tax charges will arise.

S455 tax

This tax charge is levied on a close company when a participator (or their associate) in a close company withdraws funds from their company which total over £15,000. For loans taken out from 6 April 2026 the rate of tax charged was 35.75% and before this the loan would be charged at 33.75%.

For example, if a close company lent one of its participators £50,000 on 1 May 2026 for the period ending 31 December 2026 the company will have a S455 tax charge of £17,875.

If the loan is repaid within nine months and one day of the company’s year-end the charge will disappear, but this is subject to anti avoidance rules where arrangements are in place to take the loan out again. These anti avoidance rules will not apply if the loan is repaid using taxable income such as a salary or a dividend.

If the loan is not repaid within period described above, the company will not be able to reclaim the tax back until nine months after the end of the accounting period which the loan is repaid in which can lead to a serious cash flow disadvantage.

What if the loan is written off

Writing the loan off will lead to a repayment of the S455 tax due for the company but this is not a simple solution, because the value of the loan written off is treated as a dividend subject to income tax (as high as 39.35%) and Class 1 NIC for the individual who has had their loan written off.

Benefits in Kind

Loans taken can generate a benefit in kind for income tax purposes. For instance, suppose a director had an overdrawn loan for the whole tax year of £100,000 they would have a benefit in kind of £3,750 (which is based on the loan multiplied by the official rate of interest of 3.75%). This loan is subject to income tax and Class 1A NIC. If interest is paid to the company at the HMRC rate before 6 July following the end of the tax year the benefit in kind will no loner exist.

Next steps

The above is just a summary of what is a complex area of tax and careful planning and understanding of the various rules and definitions is essential.

If you need assistance in this area, please contact Alan Rolfe by using the details below.