What is a director's loan account and what is the Section 455 tax charge?

Full answer

Director's loan accounts are a common but often misunderstood area, particularly for owner-managed small companies where the line between personal and company money can become blurred without careful record-keeping. **What creates a director's loan** A director's loan arises whenever a director takes money out of the company (or the company pays a personal expense on the director's behalf) that is not salary, a dividend, or a repayment of money the director had previously put INTO the company -- common examples include a director drawing cash for personal use ahead of formal dividends being declared, or the company paying for a genuinely personal cost by mistake. **The Section 455 tax charge** If a director's loan account is overdrawn (the director owes the company money) and remains unpaid 9 months and 1 day after the end of the company's accounting period in which the loan was made, the COMPANY (not the director personally) must pay a tax charge under Section 455 of the Corporation Tax Act 2010, currently set at 33.75% of the outstanding loan balance -- this matches the dividend upper rate, reflecting the idea that an unpaid director's loan is economically similar to an informal, undeclared dividend. **The charge is refundable, not a permanent cost** Unlike normal Corporation Tax, the Section 455 charge is repayable to the company once the loan is genuinely repaid (or written off, though writing off has separate tax consequences for the director personally) -- however, the refund is not immediate; it can only be claimed from HMRC once the repayment has actually happened, and can take a significant time to actually receive back, creating a real (if temporary) cash flow cost to the company in the meantime. **The "bed and breakfasting" anti-avoidance rule** HMRC has specific anti-avoidance rules to prevent directors simply repaying a loan just before the 9-month deadline (avoiding the S455 charge) and then immediately re-borrowing a similar amount shortly afterwards -- if a loan of £5,000 or more is repaid and a new loan of £5,000 or more is taken out within a short period (broadly within 30 days, or where there was clearly an intention to re-borrow when the repayment was made), the repayment can be disregarded for S455 purposes, meaning the charge still applies as if the original loan had never been repaid. **Benefit in kind on interest-free or low-interest loans** Separately from the S455 corporate tax charge, if a director's loan exceeds £10,000 at any point in the tax year and is provided interest-free or at below HMRC's official rate, the director personally is treated as receiving a taxable benefit in kind on the notional interest saved, reportable on a P11D and subject to Income Tax for the director and Class 1A NI for the company. **Worked example** A director draws £30,000 from her company during the year, intending to formally declare dividends to clear it but not getting round to doing so before the company's year end. The loan remains outstanding 9 months and 1 day after the year end, triggering a Section 455 charge of £10,125 (33.75% of £30,000) payable by the company to HMRC alongside its normal Corporation Tax. Because the loan also exceeds £10,000 and was interest-free, she additionally faces a personal benefit-in-kind charge on the notional interest saved for the period the loan was outstanding. If she eventually repays the £30,000 in full two years later, the company can then reclaim the £10,125 S455 charge from HMRC, but only after formally submitting a repayment claim once the loan has actually been cleared. **Practical tip** Directors should keep the loan account reconciled throughout the year and formally declare dividends (where sufficient distributable profits exist) or process additional salary through payroll BEFORE the 9-month deadline, rather than leaving withdrawals informally recorded as an outstanding loan, to avoid the S455 charge and associated cash flow cost entirely.

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