Answers · UK 2025/26
What is the loans to participators (Section 455) tax charge?
The Section 455 charge applies when a close company lends money to a participator (typically a director-shareholder) and the loan remains outstanding nine months after the company's accounting period end. The company must pay tax on the outstanding balance at a rate aligned with the dividend upper rate, though this is refundable once the loan is fully repaid.
Full answer
The loans-to-participators charge, found in Section 455 of the Corporation Tax Act 2010, exists to prevent owner-directors of close companies from extracting value tax-efficiently by simply "borrowing" money from their company indefinitely, instead of taking a properly taxed salary or dividend. **When the charge applies** If a close company makes a loan (or advance) to a participator (broadly, a shareholder, and this can extend to their associates in some circumstances) and that loan is still outstanding NINE MONTHS after the end of the company's accounting period in which the loan was made, the company must pay the Section 455 charge on the outstanding balance as part of its Corporation Tax return process. **The rate charged** The Section 455 rate has historically been set to align with the dividend upper (higher) rate, reflecting the idea that an unrepaid director's loan is economically similar to a dividend the participator has effectively received without paying the tax that would normally apply -- so as dividend tax rates have changed (rising 2 percentage points from April 2026), the Section 455 rate has moved correspondingly. **It is the COMPANY that pays, not the individual** An important and sometimes confusing point is that Section 455 is a charge on the COMPANY, calculated and paid alongside its Corporation Tax liability -- it is separate from (and in addition to) any benefit-in-kind Income Tax and Class 1A NI charge on the DIRECTOR personally if the loan also carries an interest rate below HMRC's official rate. **The charge is refundable, but not immediately** Once the loan is repaid (in full or in part), the company can reclaim the corresponding Section 455 tax -- but the refund is not immediate; it is generally available from nine months after the end of the accounting period in which the loan was REPAID, not the period in which it was originally advanced. This means a loan that is outstanding for a while and then repaid can still tie up company cash in an unrefunded Section 455 payment for a significant period. **The "bed and breakfasting" anti-avoidance rule** HMRC introduced specific anti-avoidance rules to prevent directors from artificially avoiding the charge by repaying a loan just before the nine-month deadline, then immediately re-borrowing a similar amount shortly afterwards (sometimes called "bed and breakfasting" a director's loan) -- where repayment and re-borrowing patterns suggest this kind of artificial avoidance, HMRC can treat the loan as if it had not been repaid at all for Section 455 purposes. **Combined with the beneficial loan benefit in kind** A director's loan can trigger BOTH the Section 455 charge on the company (if outstanding beyond nine months after the accounting period end) AND a benefit-in-kind charge on the director personally (if interest charged is below HMRC's official rate and the loan exceeds the £10,000 de minimis threshold) -- these are separate, cumulative considerations, not alternatives to each other. **Worked example** A company with a March year end lends its sole director £25,000 in June. If the loan remains outstanding by 1 January the following year (nine months after the March year end), the company must pay Section 455 tax on the £25,000 as part of its Corporation Tax return, calculated at the applicable rate. If the director repays £25,000 in full the following August, the company can reclaim the Section 455 tax, but only from nine months after the END of the accounting period in which the repayment fell -- meaning the cash may be tied up with HMRC for well over a year in total from the original loan being made. **Practical tip** If your close company is considering lending money to a director, plan around the nine-month deadline carefully, keep the loan below the £10,000 de minimis threshold where possible to also avoid separate benefit-in-kind reporting, and consult an accountant before repaying and re-borrowing similar amounts in quick succession, since HMRC actively looks for patterns suggesting Section 455 avoidance.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.