Director’s Loan Write-Offs: Tax Consequences, HMRC Letters, and Smarter Alternatives

If your company has written off a director’s loan in recent years—especially between 2019 and 2023—you may have heard from HMRC.

Thousands of directors have received letters from HMRC recently, querying whether they properly reported a written-off or released director’s loan in their self-assessment tax return. These letters have caused concern, and rightly so. The tax consequences of writing off a director’s loan can be substantial, involving dividend tax, National Insurance, and possibly penalties.

This blog post explains:

• What a director’s loan is
• What it means to “write off” a loan
• The tax consequences for both the company and the director
• What to do if you’ve received a letter from HMRC
• Smarter alternatives to writing off loans
• How Merranti can help you resolve or avoid these issues

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What Is a Director’s Loan?

A director’s loan occurs when a director borrows money from their company, or the company pays for personal expenses on the director’s behalf, and that money is not repaid within the financial year.

In small businesses, this often happens informally—for example:

• The company pays for a director’s private holiday
• A director takes a “temporary” cash advance
• The company covers personal credit card bills

If these amounts aren’t repaid quickly, the director’s loan account (DLA) becomes overdrawn, and this creates tax implications for both the company and the director.

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Section 455 Tax: The First Consequence

If the company is a close company (which includes most owner-managed businesses), and the director’s loan is still outstanding nine months and one day after the end of the company’s accounting period, the company must pay section 455 tax.

🔹 What is Section 455 Tax?

• It’s a tax charge on overdrawn DLAs.
• It’s charged at 33.75% (2025/26 rate), aligned with the higher dividend tax rate.
• It’s reclaimable—but only after the loan is repaid or written off.

Example:
If the director owes £30,000, and it’s still unpaid 9 months after year-end, the company pays £10,125 in section 455 tax.
If the loan is repaid later, HMRC will refund that £10,125—but only 9 months after the year in which it’s repaid.

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Writing Off the Loan: Not Always the Easy Way Out

To avoid paying section 455 tax, some companies consider writing off the loan.

This might seem efficient at first glance, but it has significant tax and NIC implications for both the director and the company.

Let’s look at these consequences in more detail.

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Tax Consequences for the Director

When a director’s loan is waived, released, or written off, HMRC treats the amount as income—but which type?

Dividend Tax Treatment

• For income tax purposes, the amount is treated as a distribution.

• The director pays dividend tax at their marginal rate:

• 8.75% at basic rate
• 33.75% at higher rate
• 39.35% at additional rate

The director must declare the amount on their self-assessment tax return for the year in which the write-off occurred.

⚠️ Failure to report this could lead to interest and penalties on unpaid tax.

Employment Income Tax (Possibly)

In some cases, the write-off could be taxed as employment income under PAYE rules—but this is rare. Dividend treatment takes priority, as confirmed by case law and HMRC’s own guidance.

So, generally, the director won’t be taxed twice—but they must report the correct amount.

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NIC Implications: A Hidden Trap

Even though the write-off is treated as a dividend for tax purposes, it is treated as earnings for National Insurance purposes.

Class 1 NIC Applies

• Employee (director) pays Class 1 NICs
• Company pays employer’s Class 1 NICs (currently 15%)

This is a big surprise to many directors—especially if the write-off was meant to simplify matters.

Example:
If a £20,000 loan is written off:

• Director might pay dividend tax at 33.75% (£6,750)
• AND Class 1 NICs at 8%–12% (~£1,600–£2,400)
• Company pays Class 1 NICs at 15% (£3,000)

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Is There a Way Around the NIC Charge?

Potentially. HMRC may accept that the loan write-off is from shareholder funds, not in the director’s capacity as an employee.

To support this, the company should:

1. Hold a formal board meeting or general meeting

2. Pass a written shareholder resolution approving the waiver

3. Execute a deed of release

4. Clearly record the release in the company’s statutory books

This helps demonstrate that the waiver is from the director’s position as a shareholder, not their employment. If successful, NICs can be avoided—but HMRC may still challenge the interpretation.

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What Happens on the Company Side?

The tax treatment of the write-off for the company is also important.

✅ No Section 455 Tax

If the loan is written off before the section 455 trigger date, no s455 tax is due.

❌ No Corporation Tax Deduction

However, the written-off loan is treated as a distribution and is not deductible for corporation tax purposes. It doesn’t reduce the company’s profits.

✅ Section 455 Refund

If the loan was already subject to section 455 tax (from a prior year), that tax becomes repayable—but only 9 months after the year in which the loan is written off.

The company must actively claim the refund—it is not automatic.

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Why HMRC Is Sending Letters (2019–2023)

In early 2025, HMRC began contacting individuals who may have received a loan write-off between 6 April 2019 and 5 April 2023 but failed to report it on their tax return.

These letters are a prompt, not necessarily an accusation. HMRC’s data suggests a write-off may have occurred—but it’s up to the taxpayer to check and respond appropriately.

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What to Do If You Received a Letter

Step 1: Review Your Records

• Was there a director’s loan?
• When was it taken?
• Was it fully or partially written off?
• Did you declare the write-off in your tax return?

Step 2: Check the Timing

• If the write-off happened between 2019/20 and 2022/23, and was not declared, you need to use HMRC’s Digital Disclosure Service (DDS).

Step 3: If You Didn’t Receive a Letter

Even if you haven’t been contacted, you still need to correct any errors if you know a write-off occurred.

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What If the Write-Off Was More Recent?

• 2023/24: You can amend your tax return until 31 January 2026
• 2024/25: You must declare the write-off on your return due by 31 January 2026 (or amend later until 31 Jan 2027)

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Alternatives to Writing Off Director’s Loans

In many cases, writing off a director’s loan is the least tax-efficient route. There are other options that are often less costly in tax and NICs:

Option 1: Declare a Dividend

• If the company has sufficient retained profits, pay a dividend to clear the loan.
• The director pays the same dividend tax, but no NICs apply.
• This can save the director up to 8% and the company 15% NICs.

Option 2: Leave It Outstanding and Pay Section 455 Tax

If the director is not ready to repay the loan:

• Let the company pay s455 tax (33.75%)
• Repay the loan in future—then the company can reclaim the s455 tax

This avoids the NICs hit and spreads out the cash burden.

Option 3: Pay the Loan Back

If the director has funds, the best option is often to repay the loan before the s455 tax trigger date.

Even if repayment is tight, it may be better to:

• Repay and avoid tax
• Then withdraw money in a tax-efficient way (e.g., via dividend)

Option 4: Pay a Bonus

Bonuses are taxed as salary, but:

• They are deductible for corporation tax
• They do trigger full PAYE and NICs

This option might be sensible for higher-profit companies seeking a CT deduction.

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Key Takeaways

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Final Thoughts: Plan Before You Write Off

Writing off a director’s loan should never be a casual decision. It’s loaded with complex tax and NIC consequences, and HMRC is actively scrutinising these arrangements.

At Merranti Accounting, we help clients:

• Avoid unnecessary section 455 charges
• Structure repayments, dividends, or bonuses efficiently
• Navigate HMRC’s disclosure process
• Ensure records and shareholder resolutions are compliant

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Need Help with a Director’s Loan Write-Off or HMRC Letter?

If you’ve received a letter, or you’re unsure how to deal with a loan on your books, don’t wait for penalties to hit.

📞 Contact Merranti Accounting today for a confidential review.

Let us help you fix the issue—and plan smarter for next time.