Section 455 Tax in 2025/26: Director Loan Accounts and the 33.75% Trap
If you’re a company director who’s ever borrowed money from your own limited company — or used your business account like a personal overdraft — you might be sitting on a hidden tax liability.
Known as Section 455 Tax, this Corporation Tax charge is triggered when directors or shareholders owe their company money at the end of the financial year. And in 2025/26, the rate is steep: 33.75%.
It’s one of the most misunderstood — and costly — traps for small business owners. But it can be avoided, reduced, or even refunded, with the right planning and timing.
In this article, we’ll explain how Section 455 Tax works, who it applies to, and what you can do before your year-end to stay in control of your tax bill.
What is a Director’s Loan Account (DLA)?
A Director’s Loan Account (DLA) is an internal record of money you owe to the company — or the company owes to you — outside of salary, dividends, or reimbursed expenses.
If you take more money out of your limited company than you’ve put in, and it’s not a declared salary or dividend, it’s classed as a loan.
This might happen when:
- You withdraw funds casually throughout the year
- The company pays for personal expenses (e.g. holidays, school fees, personal purchases)
- You repay personal costs through the business account
- You “borrow” funds to bridge short-term cash flow gaps
If the balance is overdrawn at year-end and not repaid within 9 months, Section 455 Tax kicks in.
What is Section 455 Tax?
Section 455 Tax is a special charge paid by your company, not by you personally, on the balance of any outstanding director’s loans that remain unpaid 9 months after the end of your company’s accounting period.
The rate is currently 33.75% — the same as the higher rate of tax on dividends.
So, if your DLA is overdrawn by £20,000 at the 9-month mark, the company must pay £6,750 to HMRC as a Section 455 Tax charge.
This tax is not permanent — but it can tie up company cash for years if not managed properly.
When is Section 455 Tax due?
Let’s say your company’s financial year-end is 31 March 2026.
- You take a director’s loan of £30,000 in February 2026.
- You do not repay it.
- The loan is still outstanding by 31 December 2026 (9 months later).
Your company must pay £10,125 (33.75% of £30,000) to HMRC as part of its Corporation Tax liability.
This must be paid by the normal Corporation Tax due date — 1 January 2027 in this case.
Can the tax be recovered?
Yes — but only when the loan is repaid in full.
Once the overdrawn loan is cleared (by cash repayment or by declaring a dividend/salary to cover it), the company can reclaim the Section 455 Tax — but not immediately.
You can only reclaim it:
- 9 months and 1 day after the end of the accounting period in which the loan was repaid
- Via your CT600A Corporation Tax return
- As part of your future Corporation Tax filings or by separate claim to HMRC
So the cash is often tied up for well over a year, even if you repay the loan soon after your year-end.
Options to avoid or reduce Section 455 Tax
If your director’s loan account is currently overdrawn — or you plan to take funds from your company — you still have time to act before your company’s year-end. Here’s how:
1. Repay the loan within 9 months
If you clear the balance before the 9-month deadline, no Section 455 Tax is due. This is the cleanest solution — though not always possible if cash flow is tight.
Repayment can be:
- A cash transfer from your personal account
- A declared salary or bonus
- A properly voted dividend (if you have retained profits)
Just make sure the repayment is genuine and not a circular payment (which HMRC may challenge).
2. Declare a dividend instead
If the company has retained profits, declaring a dividend to cover the overdrawn amount is a common workaround. This formalises the withdrawal as post-tax profit, and clears the loan.
However, dividends come with personal tax consequences:
- The dividend allowance is now just £500 (2025/26)
- Anything above that is taxed at 8.75%, 33.75%, or 39.35% depending on your income bracket
- Dividends must be properly declared, with board minutes and vouchers
Merranti can help you calculate the optimal dividend amount and timing to reduce both Section 455 and personal tax exposure.
3. Use salary or bonus (with PAYE)
You can clear a loan by declaring additional salary or a bonus — but this will be subject to PAYE and NIC, both for you and the company.
It’s often less tax-efficient than dividends, but may suit directors with low income or unused personal allowance.
4. Avoid the “bed and breakfasting” trap
HMRC monitors repeated loan repayments and reborrowing around the 9-month point. If you repay just before the deadline and borrow again shortly after, this is not allowed as a means to avoid tax.
To be valid, repayments must be:
- Genuine and lasting
- Not offset by new borrowing of £5,000 or more within 30 days
- Ideally repaid from personal funds, not company redirection
What if the loan is written off?
If the company decides to write off the loan, it becomes a benefit in kind to the director — taxed as if it were income.
This means:
- You pay income tax via self-assessment
- The company pays Class 1A NICs on the amount written off
- It cannot be claimed as a Corporation Tax deduction
This is usually the least efficient option and should be a last resort.
Why is this a 2025/26 issue?
With the Section 455 Tax rate now aligned with dividend tax at 33.75%, the stakes are higher than ever. Many owner-managed companies are finding themselves hit with large, avoidable tax bills simply because the DLA wasn’t monitored properly.
HMRC is also taking a firmer stance on disguised remuneration and informal withdrawals — especially where no paperwork or explanation is provided.
If your financial year ends on 31 December 2025 or 31 March 2026, you still have time to plan. But once your year-end passes, the clock starts ticking on the 9-month deadline.
Final thoughts
Director loan accounts are a normal part of small company life — but they come with big tax consequences if left unmanaged.
If your DLA is overdrawn and you do nothing, your company could face a 33.75% tax charge on money you’ve already spent — and may not get that money back for years.
At Merranti Accounting, we monitor DLAs for all our company clients as part of regular reviews. If your balance is creeping up — or you’re not sure what you owe — we’ll help you fix it before HMRC does.
Worried about your director’s loan account?
Book a Loan Account Review with Merranti today and avoid the Section 455 tax trap.
