Director's Loan Accounts: The Section 455 Tax Charge Nobody Warns You About
If your company has lent you money and the loan is still outstanding nine months after your company's year-end, your company owes HMRC a section 455 CTA 2010 charge at 33.75% of the outstanding balance. This is not income tax. It is a tax on the company. And it is widely misunderstood.
What triggers the s.455 charge
Section 455 of the Corporation Tax Act 2010 applies when a close company makes a loan to a participator (typically a director-shareholder) and that loan remains outstanding at the end of the accounting period. The company must pay a tax charge equal to 33.75% (for loans made after 6 April 2022) of the outstanding loan balance. This charge is payable alongside the corporation tax liability — nine months and one day after the accounting period end. The charge is repayable by HMRC when the loan is repaid, but repayment is not automatic and can take nine months to process.
The £15,000 bed and breakfasting trap
Some directors repay loans just before year-end and then re-borrow shortly after. HMRC's anti-avoidance rule in s.464A CTA 2010 catches this: if a loan of £15,000 or more is repaid and a new loan of £15,000 or more is made within 30 days, the repayment is matched against the new loan. The s.455 charge is not cancelled. The 30-day window applies to the aggregate of all repayments and re-drawings, not just single transactions. Directors who think they have cleared their loan account by year-end may still face the charge if the pattern matches.
The benefit-in-kind overlap
If the loan exceeds £10,000 at any point during the tax year and no interest is charged (or interest is charged below the official rate, currently 2.25%), the director also has a benefit-in-kind for income tax purposes under ITEPA 2003 s.175. This is separate from the s.455 charge. The company pays s.455 on the outstanding balance. The director pays income tax on the notional interest benefit. The company pays Class 1A NIC on the benefit. Three separate tax charges on the same loan — and many accountants only identify the first one.
The right approach
Declare dividends to clear the loan account before the nine-month deadline. If the company has sufficient distributable reserves, a dividend of £40,000 to clear a £40,000 loan costs 33.75% in higher-rate dividend tax (for a higher-rate taxpayer) but avoids the 33.75% s.455 charge plus the BIK plus the Class 1A NIC. The arithmetic is specific to each situation — the optimal clearance strategy depends on your marginal tax rate, the company's distributable reserves, and the loan balance. This is exactly the kind of computation that should be modelled before your year-end, not discovered after.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.