If you run a limited company, you may already use a director’s loan account to move money between yourself and your business. Directors often introduce funds into their company or withdraw money to help manage short-term cash flow.
When you lend money to your company, there are usually no immediate tax consequences. However, if you borrow money from the company and leave the balance outstanding for too long, HMRC may charge your company Section 455 Tax.
At Cobble, we help business owners understand directors’ loans and the tax rules that apply to them.
What is Section 455 Tax?
Section 455 Tax applies when a director or shareholder owes money to a limited company. The balance must be repaid within nine months and one day of the accounting period end.
The legislation sits within Section 455 of the Corporation Tax Act 2010. It prevents directors from using company funds as long-term personal loans.
For example, if your company’s year-end falls on 31 May 2026, you must repay any outstanding loan balance relating to that accounting period by 1 March 2027. If the balance remains unpaid after this date, the company will become liable for a Section 455 tax charge.
How Much Section 455 Tax Will You Pay?
HMRC calculates the tax charge based on the outstanding loan balance at the repayment deadline.
For loans made before 6 April 2026, the rate is 33.75%. For loans made on or after 6 April 2026, the rate increases to 35.75%.
For example, if a director owes the company £20,000 after the repayment deadline, the company could face a Section 455 charge of £6,750.
When Do You Pay Section 455 Tax?
Your company pays Section 455 Tax alongside its Corporation Tax liability.
The charge can be significant. However, it is not usually permanent. Once the director fully repays the loan, the company can reclaim the Section 455 tax previously paid to HMRC.
Repayment does not always require cash. If retained profits are available, the company may declare a dividend. It can then credit the dividend to the director’s loan account.
How Do You Reclaim Section 455 Tax?
Once the director repays the loan, the company can reclaim any Section 455 tax paid.
Companies usually make claims relating to the current accounting period or either of the previous two accounting periods through the CT600A supplementary pages.
Repayments made more than two years after the end of the accounting period in which the tax arose generally require a separate claim.
As reclaim procedures can vary, professional advice can help ensure you submit claims correctly and receive any refund without unnecessary delays.
Managing Directors’ Loans
Directors often make multiple withdrawals and repayments throughout the year. Accurate record keeping is essential because poor records can create unexpected tax liabilities.
HMRC operates anti-avoidance rules. These rules prevent directors from repaying a loan shortly before the deadline and then borrowing a similar amount again. Tax professionals commonly refer to this practice as “bed and breakfasting”.
If HMRC applies these rules, it may continue to treat the original loan as outstanding for Section 455 purposes.
HMRC may review the overall position where a director’s loan account contains multiple transactions. It may not focus on individual withdrawals and repayments. Regular monitoring can help identify issues before they become costly.
What Happens if the Company Closes?
Closing a company does not remove the obligation to deal with outstanding directors’ loans.
If a loan remains unpaid when the company stops trading, Section 455 Tax may still apply. HMRC may also treat the balance as income or a distribution. This could create additional personal tax liabilities.
If the company becomes insolvent, the appointed insolvency practitioner will usually seek repayment of any outstanding directors’ loans for the benefit of creditors.
Need Advice on Directors’ Loans?
Directors’ loans can provide flexibility when managing business cash flow, but they come with strict tax rules and reporting requirements. Understanding Section 455 Tax can help you avoid unnecessary charges and ensure you meet your obligations to HMRC.
At Cobble, we can help you review your director’s loan account, minimise potential tax liabilities and ensure you claim any available tax refunds correctly.
If you would like advice tailored to your business, get in touch with our team today.