An unpaid £20,000 director’s loan can leave the company facing a £7,150 S455 tax charge at the 35.75% rate. The critical question is not simply how much you borrowed, but whether the relevant balance is still outstanding nine months and one day after the end of the company’s Corporation Tax accounting period.
That deadline can arrive sooner than expected, particularly when personal expenditure, informal drawings and undeclared payments have accumulated in the director’s loan account. The company may also face reporting obligations, benefit-in-kind consequences and National Insurance charges, even where the loan will eventually be repaid.
[S455 tax]([INSERT TARGET URL]) is a temporary tax charge on certain loans or advances made by a close company to a participator or their associate. It is paid by the company when the relevant amount remains outstanding after the statutory deadline, although relief may become available following a qualifying repayment, release or write-off.
Key takeaways
- The company, rather than the director personally, initially pays the Section 455 charge.
- The normal payment deadline is nine months and one day after the end of the relevant Corporation Tax accounting period.
- The rate is 35.75% for loans made or benefits conferred on or after 6 April 2026.
- A loan over £10,000 can create a separate taxable beneficial-loan issue.
- Temporary repayments followed by renewed borrowing can be caught by anti-avoidance rules.
What is S455 tax?
S455 tax is a company tax charge that can arise when a close company lends money to a participator or an associate and the loan remains outstanding after the permitted repayment period.
The rules are contained in Section 455 of the Corporation Tax Act 2010. Although the charge is collected through the Corporation Tax system, it is not ordinary Corporation Tax on the company’s trading profits. It is a separate liability calculated by reference to the outstanding loan or advance.
The policy is intended to discourage shareholders from extracting company funds indefinitely through loans rather than taking properly taxed salary, dividends or other remuneration.
What is a close company?
Broadly, a close company is a UK company controlled by:
- Five or fewer participators; or
- Any number of participators who are also directors.
Most small owner-managed limited companies fall within this definition, although there are statutory exceptions.
Who is a participator?
A participator is someone with a share or interest in the company’s capital or income. A shareholder is the most familiar example, but the statutory definition can also include certain loan creditors and people with other rights in the company.
This distinction matters. A person does not fall within Section 455 merely because they are a director. The charge generally depends on the borrower being a participator, or an associate of one, and the lending company being close.
Associates can include a participator’s spouse or civil partner, parents, children, siblings, business partners and certain trustees or personal representatives.
What is an overdrawn director’s loan account?
An overdrawn director’s loan account means that the director owes money to the company.
A director’s loan account records financial transactions between the director and the company that are not already treated as salary, dividends, reimbursed business expenses or repayments of money previously introduced.
The account may become overdrawn when the company:
- Pays a director’s personal bill
- Transfers cash to the director without processing salary or declaring a dividend
- Records personal expenditure paid using a company card
- Advances money before the director’s remuneration has been finalised
- Corrects an expense that was wrongly treated as a business cost
The opposite position is a director’s loan account in credit. In that case, the company owes money to the director, perhaps because the director introduced funds or paid company expenses personally. A credit balance does not create an S455 charge.
When does S455 tax apply?
The charge normally applies where all of the following are true:
- The company is a close company.
- It has made a loan or advance to a participator or an associate.
- The amount remains outstanding at the end of the accounting period.
- It has not been genuinely repaid, released or written off within nine months and one day after that period ends.
- No statutory exclusion applies.
A useful decision check is:
Is the company close?
If no, Section 455 will not normally apply.
Is the borrower a participator or associate?
If no, consider other employment-tax rules, but Section 455 may not apply.
Was an amount outstanding at the accounting-period end?
If no, there may be no Section 455 balance to report, although the transaction records must still be retained.
Was it cleared within nine months and one day?
If yes, relief will generally prevent a payment, subject to the anti-avoidance rules.
Repayment-deadline timeline
For a company with an accounting period ending 31 March 2027:
- 31 March 2027: Determine the director’s loan balance at the period end.
- 1 January 2028: Nine months and one day have passed.
- 1 January 2028: The S455 liability is normally due on any relevant amount still outstanding.
The deadline follows the company’s Corporation Tax accounting period, not the end of the personal tax year.
What is the S455 tax rate in 2026?
The applicable rate depends on when the loan was made or the benefit was conferred.
| Date of relevant loan or benefit | S455 rate |
| 6 April 2022 to 5 April 2026 | 33.75% |
| On or after 6 April 2026 | 35.75% |
The increased rate does not automatically apply to every old loan merely because it remains unpaid after 6 April 2026. Where a director’s account contains several advances made at different times, separate rates may apply to different parts of the balance.
This makes transaction-level bookkeeping important. A single closing balance may not provide enough information to calculate the correct liability.
How is S455 tax calculated?
The basic formula is:
Relevant outstanding loan × applicable rate = potential S455 charge
Example 1: S455 tax at 35.75%
Assume a shareholder-director receives a £20,000 loan after 6 April 2026. The amount is still outstanding nine months and one day after the relevant accounting period ends.
- Loan outstanding: £20,000
- Applicable rate: 35.75%
- Potential charge: £7,150
£20,000 × 35.75% = £7,150
The company must fund the £7,150 charge even though the £20,000 remains due from the director.
Example 2: Comparing the rate periods
For a simplified £20,000 loan:
- £20,000 at 33.75% = £6,750
- £20,000 at 35.75% = £7,150
- Difference = £400
The director cannot choose the more favourable percentage. The relevant transaction date determines the rate.
What if part of the loan is repaid?
Suppose £20,000 was outstanding at the year-end and the director genuinely repays £8,000 before the deadline. Subject to the repayment-matching and anti-avoidance rules, the charge may be calculated on the remaining £12,000.
At 35.75%:
£12,000 × 35.75% = £4,290
These examples are deliberately simplified. Actual treatment depends on the dates of each advance and repayment, the accounting period, any replacement borrowing and how repayments are allocated.
When must S455 tax be reported and paid?
Relevant loans are reported as part of the Company Tax Return using the CT600A supplementary pages.
The CT600A records loans and arrangements involving participators, repayments and the resulting tax or relief. The company must also include the director’s loan balance appropriately in its annual accounts.
The payment is normally due nine months and one day after the end of the accounting period, in line with the usual Corporation Tax payment date for most companies. Different payment rules can apply to companies within the quarterly-instalment regime.
Late-payment interest can run from the due date until the liability is paid or the relevant loan is repaid. Although the underlying Section 455 amount may later be recoverable, HMRC does not refund the late-payment interest.
Companies affected by the 35.75% rate before HMRC updates its online service on 6 April 2027 should follow HMRC’s current filing instructions. An amendment may be required after the system is updated.
Can a company reclaim S455 tax?
Yes. A company can normally obtain relief when the loan is repaid, released or written off, but the timing depends on when this happens.
Where the balance is genuinely cleared before the original nine-month-and-one-day payment deadline, relief can generally prevent the company from having to fund the charge.
Where the loan is cleared later, the company cannot normally obtain the repayment immediately. Relief becomes due nine months and one day after the end of the Corporation Tax accounting period in which the repayment, release or write-off occurred.
A claim must normally be made within four years. Depending on timing, the claim may be made through CT600A, by amending a return or through HMRC’s loans-to-participators relief service.
The following are not equivalent:
- Repayment: The director returns money or valid value to the company.
- Release: The company formally gives up its right to collect the debt.
- Write-off: The company removes the debt from its records and no longer expects repayment.
All three can support Section 458 relief, but release and write-off can create significant personal tax and National Insurance consequences.
What happens if the director’s loan exceeds £10,000?
An employment-related loan can create a taxable benefit if the total outstanding balance exceeds £10,000 at any point in the tax year and the director does not pay interest at least equal to HMRC’s official rate.
From 6 April 2026, HMRC’s official rate is 3.75%, subject to any later in-year change.
The taxable amount is not normally the whole loan. It is broadly the difference between:
- Interest calculated using HMRC’s official rate; and
- Interest the director actually pays.
The company generally reports the cash equivalent of the benefit on form P11D and pays Class 1A National Insurance on that benefit. The director may pay Income Tax on the benefit through their tax code or Self Assessment position.
This is separate from S455 tax. A company can avoid the Section 455 payment because a loan is repaid before the company deadline while still having a beneficial-loan reporting obligation for the period during which more than £10,000 was outstanding.
What happens if the loan is written off?
Writing off the balance does not mean the tax consequences disappear.
For a participator, the amount released or written off is normally treated as distribution income under the close-company rules. It may therefore create a personal Income Tax liability that must be reflected in the director’s Self Assessment position.
Where the borrower is also an employee or office holder, the amount written off can attract Class 1 National Insurance through payroll. This is different from the Class 1A National Insurance that may apply to an ongoing beneficial-loan interest advantage.
The company may obtain relief for the associated Section 455 charge, but:
- Relief is subject to the statutory timing rules.
- Late-payment interest is not reclaimed.
- The accounting write-off does not automatically produce a Corporation Tax deduction.
- The decision must be properly authorised and documented.
A write-off should therefore not be treated as a simple way to remove an unwanted balance.
What are the bed-and-breakfasting rules?
The bed-and-breakfasting provisions can deny relief where a director temporarily repays a loan and then extracts the money again.
The 30-day rule
The rule can apply where:
- Repayments total £5,000 or more; and
- New loans or advances totalling £5,000 or more are made within the relevant 30-day matching period.
The repayment may be matched against the new borrowing instead of clearing the older balance. The original loan can therefore remain chargeable.
Example timeline
- 20 December: Director repays £12,000.
- 5 January: Director borrows another £10,000.
- The new borrowing occurs within 30 days.
- Up to £10,000 of the repayment may be matched with the new advance.
- Only the unmatched part may reduce the older Section 455 balance.
The arrangements rule
A separate rule can apply where:
- At least £15,000 is owed immediately before a repayment;
- Arrangements already exist to replace some or all of the amount; and
- Replacement borrowing is at least £5,000.
Unlike the 30-day test, the arrangements rule can apply where the new borrowing takes place more than 30 days later.
The rules contain detailed matching provisions and exclusions, including an exclusion for certain repayments that themselves give rise to an Income Tax charge. Repeated borrowing should be reviewed transaction by transaction rather than treated as a harmless short-term cash movement.
Can a dividend, salary or bonus clear an overdrawn director’s loan?
Yes, but only where the payment is validly created, correctly taxed and properly credited to the account.
Dividend
A dividend can reduce the balance where:
- The company has sufficient distributable reserves.
- The dividend is lawfully declared.
- The director is entitled to it as a shareholder.
- Board minutes and dividend documentation are prepared.
- The amount is correctly posted to the loan account.
- Personal dividend tax is considered.
A dividend cannot be backdated to repair an earlier balance.
Salary or bonus
Salary or a bonus can also be credited to the account, but PAYE and National Insurance must be operated at the correct time. The company must be able to meet the associated payroll liabilities.
The right choice depends on the director’s personal tax position, available reserves, company cash flow and the dates involved. An accounting entry made after the event cannot simply rewrite what originally happened.
Are larger director’s loans subject to shareholder approval?
Company-law approval may be required separately from the tax rules.
Under the Companies Act 2006, a private company generally needs members’ approval before making a loan to one of its directors or a director of its holding company. A small-loan exception can apply where the aggregate value of relevant loans and quasi-loans does not exceed £10,000.
Other exceptions exist, including certain expenditure on company business, qualifying defence expenditure, intra-group transactions and loans made by money-lending companies in the ordinary course of business.
The company’s articles, connected transactions and the precise terms of the loan should be checked before relying on an exception.
What happens if the company becomes insolvent?
An overdrawn director’s loan is an asset belonging to the company. It is money the director owes, rather than an informal withdrawal that can be ignored.
If the company enters liquidation, a liquidator may pursue the director for repayment for the benefit of creditors. The director may therefore face a personal cash demand at the same time as the business is experiencing serious financial difficulty.
Directors should seek advice early where the company cannot pay its debts, particularly before taking further funds, declaring dividends or attempting to rewrite the account.
Practical steps to manage an overdrawn director’s loan account
- Reconcile the account. Match every entry to bank records, receipts, payroll, dividends and expense claims.
- Confirm transaction dates. The S455 rate may differ between individual advances.
- Check the accounting-period end. Do not assume the personal tax-year end is relevant.
- Calculate the deadline. Identify the exact date nine months and one day after the period end.
- Review distributable reserves. Confirm whether a lawful dividend is available.
- Assess cash flow. Consider whether the director can genuinely repay the balance and whether the company can fund the tax.
- Review interest. Check the £10,000 threshold and HMRC’s official interest rate.
- Test anti-avoidance rules. Look for repayments followed by replacement borrowing.
- Prepare the reporting figures. Retain support for CT600A, P11D, payroll and Self Assessment treatment.
- Obtain advice before adjustments. Do not backdate dividends, remuneration, repayments or board records.
Bloom Financials’ bookkeeping, annual-accounts, Corporation Tax, management-reporting and cloud-accounting services can help keep these records visible during the year rather than allowing an unexpected balance to appear during year-end preparation.
How Bloom Financials can help
An overdrawn director’s loan account often involves more than one calculation. The bookkeeping records, transaction dates, company reserves, payroll position and personal tax consequences all need to agree.
Bloom Financials can support businesses with:
- Reconciling director’s loan transactions
- Correctly classifying company and personal expenditure
- Preparing annual accounts and Corporation Tax figures
- Supporting CT600A calculations and return information
- Reviewing potential beneficial-loan reporting
- Considering lawful dividend, salary or repayment options
- Maintaining cloud-accounting records
- Preparing cash-flow forecasts and management reports
- Supporting HMRC and Companies House compliance
Advice should be based on the company’s actual records. No repayment, dividend, write-off or remuneration strategy is suitable for every director.
Frequently asked questions about S455 tax
Is S455 tax paid by the company or the director?
The company pays the Section 455 charge. The director can separately face Income Tax or National Insurance consequences if the loan is beneficial, released or written off.
Is S455 tax the same as ordinary Corporation Tax?
No. It is reported and collected through the Corporation Tax system, but it is a separate charge based on loans or advances rather than taxable company profits.
Can I prevent the charge by repaying the loan before the deadline?
A genuine repayment within nine months and one day will usually prevent a payment, subject to the repayment-matching and bed-and-breakfasting rules.
Can the company reclaim the charge after a later repayment?
Usually, yes. Relief normally becomes due nine months and one day after the end of the accounting period in which the loan was repaid, released or written off.
How long does an S455 repayment take?
HMRC cannot normally make the repayment before the statutory relief date. Processing time after a valid claim varies, so the company should not treat the amount as immediately available cash.
Does a director’s loan appear on a Self Assessment return?
Not every loan is automatically reported as personal income. A beneficial-loan amount, a release or a write-off may need to be included in the director’s personal tax position.
Can a dividend clear an overdrawn loan?
A valid dividend can be credited to the account if sufficient distributable reserves exist and the dividend is properly declared and documented. It cannot be backdated.
What happens if I repay the money and borrow it again?
The repayment may be matched with the replacement borrowing under the 30-day or arrangements rule. The older balance may therefore remain subject to the charge.
Does S455 tax apply when the company owes the director money?
No. A credit director’s loan account means that the company owes the director. Section 455 is concerned with relevant amounts owed to the company.
Conclusion
An overdrawn director’s loan account is manageable when the transactions and deadlines are identified early. It becomes more difficult when the balance is discovered after the company’s accounts have been prepared, the repayment deadline is close or further withdrawals have already been made.
For post-6 April 2026 advances, a £20,000 outstanding balance can produce a £7,150 S455 tax liability. That charge may eventually be recoverable, but it can still remove cash from the company for a substantial period and may sit alongside benefit-in-kind, Income Tax or National Insurance liabilities.
Bloom Financials can review the underlying records, calculate the potential charge and help prepare the relevant accounting and Corporation Tax information. Early review gives the company more time to choose a lawful, properly documented course of action.
