What is s455 tax on director’s loans?

Section 455 tax is a Corporation Tax charge on loans to participators (namely, directors or shareholders) that remain unpaid for nine months and one day after the company’s accounting period ends.

The current rate is 33.75% of the outstanding loan balance (from 6 April, 35.75%). The company pays this charge at the same time as its normal Corporation Tax (i.e. nine months and one day after the year‐end). Section 455 tax is payable by the company in respect of directors’ loan accounts under certain circumstances. The name of the tax refers to section 455 of the Corporation Tax Act 2010.

It’s important to remember that when paid on time, the s455 tax is effectively temporary, and can be refunded entirely when the loan is clear. With the right conditions and timing, you could be paying nothing extra.

In this article, we explain what s455 tax is, how to repay on time to avoid extra payments, and what happens if you don’t repay the loan.

What is Section 455 tax under the Corporation Tax Act?

Section 455 of the Corporation Tax Act 2010 targets close companies that make loans to their participators (directors or shareholders) and do not recover them quickly. If a participant owes money to the company and it remains outstanding for nine months and one day after the accounting period end, the company becomes liable for a temporary tax charge.

The current s455 charge rate is 33.75% on the unpaid amount (loans made before 6 April 2022 were charged at 32.5%). Importantly, this tax is paid by the company via the CT600A supplement to the Corporation Tax return, not by the director.

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What is a director’s loan?

A director’s loan is when the director (or a member of their close family) takes money from the company that isn’t salary, dividend, reimbursed expenses or a business-related payment.

Such withdrawals are recorded in the director’s loan account (DLA) – essentially a running balance between the company and its director. If the DLA is overdrawn (the director owes money to the company), Section 455 may apply if that debt is not cleared within the required timeframe. For more on managing DLAs and tax rules, see our director’s loan account guidance guide.

When does s455 tax apply?

Section 455 only applies if a loan remains unpaid beyond the deadline. If the entire loan is repaid within nine months of the accounting year‐end, no s455 tax arises. But any outstanding balance at nine months and one day is subject to the charge. For example, if a director still owes £10,000 at that point, the company must pay 33.75% of £10,000 as s455 tax.

The company reports this charge on form CT600A when filing its Corporation Tax return for that period. (After April 2022, the rate is linked to the higher-rate dividend band, hence 33.75%.) Any repayment made after the deadline does not reduce the original charge – the tax was assessed on the balance at the deadline.

How to avoid paying s455 tax

The simplest way to avoid Section 455 is to clear the loan on time. Repay the loan in full (or effectively replace it with a taxable dividend or salary) within nine months of the year-end.

Repay on time

Clear the loan or convert it into salary/dividends before the 9-month deadline.

Genuine business loan

If the withdrawal is truly for trade purposes, document it as an ordinary business loan or payable on normal credit terms. Small loans (under £15,000 to a non-shareholder employee) and standard trade credits (repayable in less than six months) are generally exempt from s455.

Formal terms

Use a written loan agreement with interest at HMRC’s official rate. Paying interest at the official rate and documenting repayments on schedule won’t, in itself, remove an s455 charge if the loan isn’t repaid. Still, it avoids additional tax charges (like benefits-in-kind) and shows genuine intent.

Don’t rely on workarounds

Tax rules disallow tricks like immediate “bed and breakfast” repayments. For example, HMRC ignores any repayment of £5,000 or more followed by a new advance within 30 days. In practice, simply plan to pay the loan on time.

Reclaiming Section 455 tax: when and how

Reclaiming Section 455 tax is done after the loan has been repaid.

If a loan is repaid (or formally written off or released) after the s455 tax has been paid, the company can reclaim the tax. However, the company cannot apply for a refund until after the nine-month deadline of the period in which the repayment occurred.

In other words, if the loan is repaid in a financial year ending 31 March 2023, the earliest refund claim date is 1 January 2024. The company has up to four years from that accounting period end to make the claim. The refund is proportional to the amount repaid – for example, if the company cleared half the outstanding loan, it can reclaim half the s455 tax it paid.

The s455 tax cannot be paid straight away. The company effectively needs to ‘wait out’ a full accounting period and Corporation Tax cycle before HMRC allows the claim.

When can the tax be reclaimed?

The crucial timing is that the loan repayment must fall into a completed accounting period. HMRC requires a wait of 9 months and 1 day after that period ends before accepting a reclaim. For example, if a loan is repaid on 28 February 2023 (in a year ending 31 March 2023), you cannot claim relief until 1 January 2024. Once eligible, the company should promptly claim the credit to maximise cash flow.

Forms CT600A vs L2P: what’s the difference?

There are two routes to claim s455 relief. If you are making a claim while filing your Corporation Tax Return for the relevant period (and it is within 2 years of that period end), you can include the reclaim on the CT600A supplementary pages. This effectively adjusts the return to get the credit. If more than 2 years have passed, or you need to claim for an older period, you must use HMRC’s “loans to participators” claim form (the L2P form). You can find L2P on GOV.UK or make the claim online.

Director’s loans as benefits in kind: when to report

Separate from s455, any loan to a director is a benefit in kind if it exceeds £10,000 at any point in the tax year. In that case, the “notional interest” (the difference between HMRC’s official rate and any interest paid) is taxed on the director. The company must report this benefit on the director’s P11D form and pay Class 1A NIC on the amount. Currently, the official interest rate is 3.75% (for 2025/26). Charging and actually paying interest at or above the official rate each year avoids any taxable benefit. (If interest is charged below the official rate, the difference is the taxable “benefit”.)

When a director’s loan exceeds £10,000, it must be treated as a benefit in kind. The director is taxed on the notional interest, which the company reports on form P11D. The employer then pays 15% Class 1A NIC on the benefit. Properly charging the HMRC official interest rate (currently 3.75%) each year prevents any additional tax charge.

What happens if you don’t repay the loan?

If the director never repays the loan, the Section 455 charge becomes a permanent cost for the company. HMRC keeps the tax paid, and the company cannot claim it back.

In practice, a company might decide to write off the debt. Writing off the loan means treating that amount as a distribution to the director (usually taxed at dividend rates). Once written off, the loan is “cleared”, and the company can then reclaim any s455 tax on it. However, the director will owe personal tax on the amount written off.

Example: repayment and reclaim

Scenario: A company with a 31 March 2022 year-end lends £12,000 to a director on 28 February 2022. By 31 March 2022, the outstanding loan is £12,000. The director repays £3,000 on 30 July 2022 (within nine months). This leaves £9,000 unpaid on 1 January 2023 (nine months and one day later). The company thus pays 33.75% x £9,000 = £3,038 s455 tax by January 2023.

Reclaim: Suppose the director then repays a further £4,500 on 28 February 2023. The company can claim back half of the £3,038 tax (i.e. £1,519) because half of the original outstanding loan has now been cleared. The company files the reclaim in its return for the period ending 31 March 2023 (once the 9-month deadline for that period has passed).

Caution: legal and practical implications

Director’s loans and s455 are high-risk areas for HMRC scrutiny. Anti-avoidance rules are strict. For example, repaying a loan just before the deadline and taking a new loan within 30 days is ignored by HMRC. Any circular or artificial arrangement can be disallowed.

ATT guidance warns that both the beneficial loan rules and Section 455 are commonly reviewed in compliance checks. In addition, directors have a duty to handle company funds properly; paying dividends while a loan is outstanding can be an illegal dividend, making the director personally liable. Always keep clear records, document any repayments, and consider professional advice if needed. For more context on director duties, see our dedicated article on director responsibilities under UK law.

To stay compliant and minimise unexpected tax charges, be sure your company’s financial practices are sound. Visit the Quality Company Formations homepage to register your company and get expert guidance on company administration, Corporation Tax and director responsibilities.