If you’ve ever taken money out of your company that wasn’t a salary or a dividend, you’ve probably touched the rules covered by Section 455.
Most directors do it without thinking – a few thousand pounds out of the business account to cover a personal cost, with the intention of paying it back. The trouble is, leaving that balance hanging around for too long can trigger a tax bill the company didn’t see coming.
And as of 6 April 2026, that bill is bigger. The Section 455 rate has increased from 33.75% to 35.75%, in line with the higher dividend rate announced in the November 2025 Budget. For directors with overdrawn loan accounts running across that date, the maths now changes depending on when the borrowing happened.
This article walks through how Section 455 works in 2026/27, what the rate change means in practice, and what you can do to keep on top of it.
What Section 455 Is
Section 455 of CTA 2010 applies where a close company makes a loan or advance to a relevant person who is a participator, or an associate of a participator – or where arrangements confer a benefit on a participator under s464A.
A few definitions worth getting straight:
- Close company: A UK company controlled by five or fewer participators, or by any number of participators who are also directors. Most owner-managed businesses fall into this category.
- Participator: Anyone with a share or interest in the company’s capital or income. Shareholders and directors are the obvious examples, but the definition can also catch loan creditors and certain other connected parties.
- Associate: Family members and other connected parties of a participator – spouses, civil partners, parents, children and so on. Loans to them count too.
The s455 charge is paid by the company, though the director or shareholder may have separate personal tax consequences – for example on a beneficial loan or a written-off loan. The tax is also temporary: once the loan is cleared, the company can reclaim it.
The catch is that it can take well over a year to get the cash back, which is why Section 455 ends up being a cashflow tax for owner-managed businesses that aren’t paying attention.
The April 2026 Rate Change
The Section 455 rate is tied to the dividend upper rate. When dividend tax rises, Section 455 rises with it. From 6 April 2026:
- Loans made before 6 April 2026: Charged at 33.75%
- Loans made on or after 6 April 2026: Charged at 35.75%
That two-point increase doesn’t sound dramatic, but it adds up on bigger balances. On a £50,000 director’s loan, the Section 455 charge is £17,875 under the new rate, compared with £16,875 under the old one. On £100,000, the figures are £35,750 versus £33,750.
What makes this awkward is that loan accounts often span the rate change. If your director’s loan account ran across 6 April 2026 with money going in and out, working out which loans were made before and which after gets messy.
By default, HMRC applies the “rule in Clayton’s case” – an old common law principle that says that, where multiple debts exist and no one has specified which is being paid off, repayments are treated as clearing the oldest debt first. Applied to a director’s loan account, this means earlier (33.75%) loans are treated as repaid before later (35.75%) ones, leaving the higher-rate borrowing outstanding and resulting in a larger Section 455 bill than necessary.
The fix is to override the default by documenting the allocation explicitly. A short email or board minute confirming that any repayments are to be matched against post-6 April 2026 loans first will usually do the job, and it can save the company a meaningful amount on a mixed-rate balance.
One practical wrinkle for 2026/27 filings: HMRC has said the Corporation Tax online service won’t reflect the 35.75% s455 rate until 6 April 2027.
Companies with post-5 April 2026 loans that need to file before then may need to amend the return once HMRC’s system is updated. Worth flagging to your accountant if your year-end falls in this window.
How a Director’s Loan Account Becomes a Problem
A Director’s Loan Account is the company’s running record of money owed to or from a director, outside of salary, dividends and reimbursed expenses. Most owner-managed companies have one, and most use it occasionally without issue.
Section 455 kicks in when the account is overdrawn at the company’s year-end and stays overdrawn nine months and one day later, when corporation tax falls due. If the loan is repaid, released or written off within nine months and one day of the period end, relief should normally eliminate any s455 tax payable, provided the anti-avoidance rules don’t apply. The loan still has to be reported on the company’s CT600A, but the tax doesn’t bite.
The most common scenarios that trigger Section 455 are:
- Direct cash withdrawals from the company that aren’t salary, dividend or expense reimbursement
- Personal expenses paid by the company without the director repaying or having them treated as salary
- Overdrawn loan accounts at year-end that drift past the nine-month deadline
- Loans to a director’s family or associates under the same rules
Worth knowing: Section 455 applies based on when the loan was made, not when the year-end falls. So a director who takes a loan in March 2026 and another in May 2026 has two different rates applying to the same loan account, even within a single accounting period.
Repaying the Loan – And the Bed and Breakfasting Trap
If the loan is cleared in time, no Section 455 tax sticks. There are three normal ways to do that:
- Cash repayment from the director’s personal funds
- Declaring a dividend equal to the loan balance, subject to having distributable reserves and the director’s personal dividend tax. Dividends paid from 6 April 2026 carry the new 10.75% / 35.75% / 39.35% rates – worth modelling alongside our director’s salary and dividends guide for 2026/27
- Voting a salary or bonus to cover the balance, which then runs through PAYE and NIC
Each has trade-offs. Cash is cleanest but not always available. Dividends carry the new personal rates. Salary brings income tax and both employee and employer NI into play. The right route depends on your wider remuneration position.
What you can’t do is pay the loan back, then immediately take it out again. HMRC has anti-avoidance rules covering exactly this:
- The 30-day rule: If repayments of £5,000 or more are made and new loans of £5,000 or more are taken within 30 days, the repayment is matched against the new loan, not the original – the Section 455 charge stays in place
- The £15,000 arrangements rule: Where the loan balance is £15,000 or more and there’s an arrangement to redraw, HMRC can ignore the repayment even outside the 30-day window
Genuine repayments funded by income that’s already been taxed – a properly declared dividend or bonus, for instance – aren’t caught. The targets are circular movements designed solely to dodge the charge.
Reclaiming Section 455 Once the Loan Is Repaid
Section 455 is refundable, but the timing is slow. Once the loan is repaid, written off or released, the company can reclaim the tax – but only nine months and one day after the end of the accounting period in which the loan was cleared. So a loan repaid in May 2026 (a 31 March year-end company) can’t be reclaimed until 1 January 2028.
The reclaim can be made through CT600A where appropriate, or using form L2P where a separate claim is needed. The refund is proportional: clear half the loan and you can reclaim half the tax. There’s a four-year deadline from the end of the accounting period in which the repayment happened.
In practice, this means Section 455 can tie up company cash for two years or more even when the loan is cleared promptly. For an owner-managed business, that’s working capital out of action – and it’s the main reason getting the loan account right in the first place matters.
Loan Write-offs and Cheap Loans
Section 455 isn’t the only tax issue with director’s loans. Two other points come up regularly:
- Loan write-offs: If the company writes off or releases a loan to a participator, HMRC treats the written-off amount as a dividend in the participator’s hands. The director pays personal dividend tax (at 10.75% / 35.75% / 39.35% for dividends after 6 April 2026). The company can’t claim a corporation tax deduction for the write-off. Where the borrower is also an employee or director, a write-off can also create employment tax and NIC consequences – HMRC distinguishes beneficial loans, which attract Class 1A NIC on the benefit, from written-off employee loans, where Class 1 NIC may apply
- Interest-free or below-market loans: Where the loan balance exceeds £10,000 at any point in the tax year and the director isn’t paying interest at HMRC’s official rate, a benefit-in-kind charge arises. The director pays income tax on the deemed interest, and the company pays Class 1A National Insurance
The £10,000 threshold for benefit-in-kind purposes is separate from the Section 455 rules – it can apply even where the loan is repaid before the nine-month deadline, so don’t assume that clearing the year-end balance closes off all the issues.
Exceptions Worth Knowing
A few situations sit outside the Section 455 rules:
- Loans made in the ordinary course of business: Where the company is a money-lender, loans to participators on normal commercial terms aren’t caught
- Small loans to full-time employees: Loans of £15,000 or less to a full-time employee with no material interest in the company (broadly, no more than 5% of the share capital) are exempt
- Loans repaid within the nine-month window: Where the loan is cleared within nine months and one day of the period end, relief should normally eliminate the s455 charge, though the loan still needs disclosing on the CT600A
These exemptions are narrow. A director-shareholder of a typical owner-managed company won’t qualify for the small-employee exemption, and most small businesses aren’t in money lending.
The cleanest way to stay outside Section 455 is to keep the loan account in credit, or to clear any overdrawn balance well before the corporation tax deadline.
Practical Steps for Directors
Section 455 is one of those rules that catches directors who weren’t watching. The fix is straightforward in principle:
- Review the DLA quarterly, not just at year-end. Catching an overdrawn balance early gives you time to fix it before the corporation tax clock starts
- Document loan dates clearly, especially around 6 April 2026. Get repayment allocations in writing so you’re not stuck with HMRC’s default oldest-first treatment
- Plan repayments before the nine-month deadline, using a dividend or bonus if cash isn’t available – but watch the 30-day and £15,000 rules
- Don’t ignore loans under £10,000, assuming they’re too small to matter. The benefit-in-kind charge can still bite, and HMRC scrutinises small overdrawn balances as well as large ones
Good bookkeeping is the foundation here. If your DLA isn’t being reviewed monthly, you’re flying blind – and Section 455 is one of the easier tax bills to walk into without realising.
How Double Point Can Help
Section 455 is a small set of rules that can produce a big bill if a director’s loan account is left to drift. For most owner-managed businesses, the answer is regular monitoring, clear documentation, and a plan to clear any overdrawn balance well before the corporation tax deadline.
At Double Point, our chartered accountants help company directors stay on top of their loan accounts and structure their remuneration through proper tax planning to avoid Section 455 issues in the first place. We can review your current position, advise on repayment timing around the April 2026 rate change, and handle the L2P reclaim once a loan is cleared.
Book a free consultation and we’ll talk it through.