Fast answers
- Section 455 tax is currently 33.75% of the loan balance outstanding 9 months after year end (matched to the dividend upper rate).
- Avoid Section 455 by clearing or releasing the loan within 9 months and 1 day of the accounting period end.
- Loans over £10,000 at any point in the year create a benefit-in-kind unless interest at the HMRC official rate is charged and paid.
- "Bed and breakfast" rules: repayments within 30 days followed by £5,000+ new borrowing keep the Section 455 charge in place; for loans £15,000+ the rule applies even if the new borrowing is planned.
- Everything must be reported on the CT600A and, if there's a benefit-in-kind, on the director's P11D with Class 1A NIC paid by the company.
What counts as a director's loan
Any money a close company (broadly, a company controlled by five or fewer participators) lends to a director or their close family that is not salary, dividend, or reimbursed expense sits in the director's loan account. Overdrawn balances trigger tax consequences; credit balances do not.
- Cash withdrawals beyond salary or dividends
- Personal expenses paid on the company card that are not repaid
- Personal use of company funds for deposits, rent, or school fees
- Loans to family members or trusts connected to the director
Section 455 tax: timing and rate
If the loan is still outstanding 9 months and 1 day after the company's year end, the company pays a temporary Corporation Tax charge (Section 455 CTA 2010) at the dividend upper rate—currently 33.75%—on the outstanding balance. The tax is reclaimed when the loan is cleared, but only 9 months after the end of the accounting period in which the repayment happens, so cash can be locked up for a long time.
Section 455 timeline
Year end
Director owes the company money at the balance sheet date.
+9 months and 1 day
If still overdrawn, the company must pay Section 455 tax with its Corporation Tax bill.
Repayment
Loan cleared by cash repayment, dividend, or bonus (ensure correct paperwork and taxes on the dividend/bonus).
Reclaim
Section 455 can be reclaimed on form L(CTR) no earlier than 9 months after the end of the accounting period in which the loan was repaid.
Anti-avoidance: 30-day and £15k rules
- If you repay and then borrow again within 30 days, repayments are matched to the new loan; Section 455 still applies (for amounts over £5,000).
- If loans exceed £15,000 and there's any intention to re-borrow, the matching rule applies even if you wait more than 30 days.
- Genuine repayments that fully clear the balance and are not followed by fresh borrowing avoid the matching rule.
Benefit-in-kind on cheap or interest-free loans
If the loan balance exceeds £10,000 at any point in the tax year and the company does not charge at least the HMRC official rate of interest, the director is taxed on the benefit and the company pays Class 1A National Insurance. Directors can avoid the benefit by charging and paying interest at the official rate through the year, not just posting it at year end.
- Threshold: benefit applies if the balance is above £10,000 at any point in the year.
- P11D reporting: disclose the loan and any interest charged; the director pays income tax on the benefit.
- Class 1A NIC: the company pays Class 1A on the taxable benefit via the P11D(b).
- Record-keeping: track daily balances to know when the £10,000 threshold is crossed.
Practical ways to clear or avoid overdrawn balances
Use a properly minuted dividend or bonus
Declaring a dividend (with available distributable reserves) or paying a bonus can clear the loan, but these payments create their own tax liabilities. Keep minutes and vouchers for dividends; operate PAYE for bonuses.
Charge interest at the official rate
Charging and actually paying interest at the HMRC official rate reduces or removes the benefit-in-kind. Interest received is taxable income for the company.
Avoid circular repayments
Transfers in and out around the 9-month deadline that are immediately re-borrowed are likely to be caught by the anti-avoidance rules. Plan genuine repayments that stick.
Director's loan compliance checklist
Common pitfalls to avoid
- Treating personal spends on the company card as "business" without evidence—these add to the loan balance.
- Declaring dividends without reserves—an unlawful distribution won't clear the loan.
- Assuming a short-term loan escapes tax—benefit-in-kind applies as soon as the balance exceeds £10,000, even briefly.
- Forgetting that loans to family or trusts connected to the director are also caught.
- Missing the 9-month deadline and waiting another full period to reclaim Section 455—creates needless cashflow strain.
Where this fits with other Companies House duties
Overdrawn loan accounts often show up alongside late filings or weak bookkeeping. Keeping your Companies House filings on time and your loan account reconciled reduces the chance of HMRC enquiries or auditor flags.
Stay ahead of deadlines and keep your records straight. CH Watch monitors Companies House changes, filing deadlines, and director changes so you can act before penalties or Section 455 charges bite.
References
- [1]Director's loans: your company and you Available at:www.gov.uk/directors-loans
- [2]If you owe your company money Available at:www.gov.uk/directors-loans/you-owe-your-company-money
- [3]Borrow money from your company Available at:www.gov.uk/directors-loans/borrow-money-from-your-company
- [4]If you repay your loan Available at:www.gov.uk/directors-loans/if-you-repay-your-loan
- [5]Expenses and benefits: loans provided to employees Available at:www.gov.uk/expenses-and-benefits-loans-provided-to-employees