What is the S455 tax charge on a Director's Loan Account?

Section 455 of the Corporation Tax Act 2010 (S455) imposes a tax charge on a company when a participator (usually a director or shareholder) borrows money from the company and does not repay it within a specified timeframe. This prevents directors from avoiding personal tax by leaving money in the company as a loan rather than drawing it as salary or dividends.

The S455 charge is levied on the company, not the director personally. The rate is 33.75%, which mirrors the higher rate dividend tax rate. If a director has a loan balance of £20,000 outstanding nine months and one day after the company's year end, the company must pay S455 tax of £6,750 (33.75% of £20,000).

The nine-month window is calculated from the end of the company's Corporation Tax accounting period. For a company with a 31 March 2026 year end, the S455 charge reporting and payment deadline is 31 December 2026 (nine months after 31 March). If the loan is outstanding on that date, the company pays S455 on its Corporation Tax return.

The S455 charge is temporary rather than permanent. When the director repays the loan to the company, the company can claim a repayment of the S455 tax from HMRC. However, there is a nine-month delay on the repayment too: the company can reclaim S455 only nine months after the end of the accounting period in which the loan was repaid. For example, if the director repays the loan in June 2027 (within the company's year ending March 2027), the company can reclaim the S455 nine months after 31 March 2027, which is 31 December 2027. The delay in reclaiming the tax is a significant cash flow cost.

If the director writes off the loan (the company forgives the debt), the write-off is treated as a distribution. The director is taxed on the written-off amount as if it were a dividend at dividend tax rates. In addition, the company cannot reclaim the S455 on a written-off loan.

A directors' loan account (DLA) can be overdrawn (where the director owes the company money) or in credit (where the company owes the director money for expenses paid personally or salary owed). S455 applies only to overdrawn DLAs.

For interest: if the company lends money to a director interest-free or at a rate below the HMRC official rate (2.25% for 2025/26), the director receives a benefit in kind equal to the difference between interest at the official rate and interest actually charged. This benefit in kind must be reported on a P11D and the director pays income tax on the deemed interest benefit. For a £20,000 loan at 0% interest versus the 2.25% official rate, the annual benefit is £450, on which a basic rate taxpayer pays £90 income tax.

The S455 charge applies to loans made to participators in close companies. A close company is one controlled by five or fewer participators or by its directors. Almost all small UK limited companies are close companies.

To avoid the S455 charge, the director should repay the loan before the nine-month deadline. Common repayment methods include: using a declared dividend to clear the DLA balance; using a bonus; directly repaying cash to the company's bank account; or offsetting expense reimbursements owed by the company to the director against the DLA balance.

Bed and breakfasting: HMRC is alert to arrangements where the director repays the loan shortly before the nine-month deadline and then takes it back out shortly after. If the loan is repaid and re-drawn within 30 days, HMRC's anti-avoidance rules treat the loan as if it had never been repaid, preventing the S455 charge from being avoided in this way.

Loans over £10,000 to directors must be approved by shareholders under the Companies Act. This is a company law requirement separate from the tax rules. Failure to obtain shareholder approval can make the transaction unlawful.

AccountsOS tracks your Director's Loan Account balance and alerts you when the balance is overdrawn and approaching the nine-month S455 trigger date, so you can act before the charge crystallises.