Loan to Participators (Section 455 Tax)

Section 455 tax is currently charged at a rate equal to the dividend upper rate for the tax year in which the loan or advance is made. For loans made on or after 6 April 2022, this rate is 33.75%. The charge applies to any outstanding loan from a close company to a participator (a director or shareholder) that is not fully repaid within nine months and one day of the company's accounting year end.

This article explains how S455 tax applies to directors' loans, how the rate has changed, when HMRC will refund it, what the bed and breakfasting rules mean in practice, and how to manage your directors' loan account to avoid unnecessary charges.

What Is a Close Company for S455 Purposes?

For a company to be a close company it must satisfy the following conditions:

• The company must be resident in the UK
• The company must be controlled by either: a maximum five participators or, Controlled by any number of directors who are also shareholders

However, the following companies cannot be close companies:

• Non-resident companies
• Registered industrial and provident societies and building societies.
• Companies controlled on behalf of the Crown.
• Companies controlled by open companies.
• Quoted companies with substantial public interest.

In practice, most owner-managed limited companies and small property investment companies are close companies.

What Is the Current S455 Tax Rate?

The current S455 tax rate is 33.75%, applying to the outstanding balance of any qualifying loan at nine months and one day after the end of the company's accounting period.

The rate increased in April 2022 alongside the rise in dividend tax rates. It is linked to the higher rate of dividend tax so if dividend tax rates change in a future Budget, the S455 rate is likely to change with them.

When Does Section 455 Tax Apply to a Directors' Loan

S455 tax applies when a participator, a director, shareholder, or their associate borrows money from a close company and the loan (or part of it) is still outstanding nine months and one day after the end of the accounting period in which it was taken.

S455 also applies to loans made to associates of a participator. Associates include a spouse, civil partner, parents, children, and certain business partners.  

When Does Section 455 Tax Have to Be Paid?

For small companies not paying corporation tax by instalments, the S455 payment is due nine months and one day after the end of the accounting period, the same deadline as the loan repayment test.

For larger companies paying corporation tax by instalments, the S455 liability is added to the instalment schedule.

What Are the Bed and Breakfasting Rules for Directors' Loans?

Repaying a directors' loan before the nine-month deadline then re-borrowing shortly after does not necessarily avoid S455. HMRC's bed and breakfasting rules are designed to counter this approach.

If a director repays £5,000 or more of a loan within 30 days of a new loan being taken out from the same company, HMRC treats the repayment and the new borrowing as connected. The original S455 charge is treated as if the repayment never happened.

The 30-day window applies in both directions so a repayment made 30 days before or after a new drawing can trigger the rule.

For amounts below £5,000, the rule does not automatically apply, but HMRC can still challenge arrangements it considers artificial.

Can You Reclaim S455 Tax After Repaying a Directors' Loan?

Does S455 Apply if You Own Only a Small Number of Shares?

S455 does not apply to an employee shareholder if both of the following conditions are met:

• The borrower works full-time for the company or an associated company
• The loan does not exceed £15,000
• The borrower does not hold a material interest in the company 

S455 also does not apply if the loan was made in the ordinary course of a money-lending business, or if there is a supply of goods or services in the ordinary course of trade.

What Happens if a Directors' Loan Is Written Off?

If the company writes off an unpaid directors' loan, the amount is typically treated as dividend income for a participator. However, if the borrower was not a participator at the time the loan was made, the treatment can be complex; the amount may be treated as employment income.

The first £500 of dividend income in a tax year is tax-free (the dividend allowance, reduced from £1,000 from 6 April 2024). Any amount above that is taxed at the relevant dividend rate based on the director's total income.

For the company, writing off the loan allows it to reclaim the S455 tax already paid, as the write-off is treated as if the loan were repaid. However, the written-off amount is not deductible as a business expense for corporation tax purposes.

In addition to the income tax charge, the amount released or written off must normally be treated as earnings liable for Class 1 National Insurance contributions (NICs).

Why Is the S455 Rate Set at 33.75%?

HMRC designed S455 to reflect the tax cost of extracting money from a company as dividends. The 33.75% rate matches the higher rate of dividend tax, the rate applicable to dividends received by a higher-rate taxpayer.

The logic is that a director borrowing from their company without paying S455 would effectively be accessing funds at no tax cost, which would not be possible through a dividend or salary. By charging a tax that mirrors the dividend rate, HMRC removes the tax advantage of using a loan as an alternative to paying a dividend.

S455 was introduced to close a specific loophole: small company directors withdrawing funds for personal use through loans rather than taking them as taxable income.

How Should You Manage a Directors' Loan Account to Avoid S455?

A directors' loan account (DLA) records all money a director borrows from, or pays into, the company. Keeping it in good order reduces the risk of unexpected S455 charges.

Practical steps to manage a DLA:

• Track drawings in real time. Do not wait until year end to reconcile the account. Unrecorded drawings are the most common cause of surprise DLA balances.
• Monitor the nine-month deadline. Know your company's year end and the repayment deadline. Set a calendar reminder at least three months before the deadline to review the outstanding balance.
• Plan repayments ahead of the deadline. If the balance cannot be fully cleared, calculate the S455 liability early so it can be included in your tax planning.
• Avoid last-minute repayments followed by re-borrowing. The bed and breakfasting rules (see above) will apply to repayments of £5,000 or more made within 30 days of a new drawing.
• Consider paying a dividend instead. If the company has sufficient distributable reserves, taking a dividend rather than an informal loan avoids DLA complications entirely.
• Check benefit in kind rules. If a loan exceeds £10,000 and is interest-free, it may be treated as a benefit in kind. This triggers a P11D reporting obligation and a Class 1A National Insurance charge for the company.

Conclusion

S455 tax is not designed to be a permanent cost, it is rather a temporary charge that HMRC refunds once the loan is cleared. The 33.75% rate reflects what HMRC would forgo if directors could access company funds without any tax consequence. In practice though, the rules around repayment timing, re-borrowing, and larger loan thresholds mean the charge catches more directors than expected, usually because the loan account was not reviewed early enough in the year.

If you have an outstanding directors' loan or are unsure whether your current DLA position triggers an S455 liability, speaking with a specialist before your year end is significantly more cost-effective than managing a charge after the fact.

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