Section 455 Charge on Directors’ Loan Accounts: UK Tax Guide

The section 455 charge catches companies and by extension their directors, by surprise more often than almost any other provision in the Corporation Tax Act 2010. At 33.75% of the outstanding loan balance, it is an expensive oversight. Understanding when it applies, how to avoid it legitimately and how to reclaim it once the loan is cleared is essential knowledge for any director-shareholder of a UK private company.

What triggers the s455 charge?

Section 455 CTA 2010 applies when a close company makes a loan or advance to a participator or to an associate of a participator and that loan or advance remains outstanding nine months and one day after the end of the accounting period in which it was made.

The key definitions are:

• Close company: broadly, a company controlled by five or fewer participators or any number of participators who are also directors. Almost all owner-managed private companies qualify
• Participator: a person with a share or interest in the capital or income of the company. A director who holds shares is a participator. A loan to a non-shareholder director does not trigger s455 (though it may still give rise to a PAYE/NIC charge)
• Loan or advance: interpreted broadly to include not just formal loans but also overdrawn directors’ current accounts, expenses advances and payments made on behalf of the director that are treated as drawings

The current s455 rate

The s455 charge rate was increased from 32.5% to 33.75% for loans made on or after 6 April 2022, aligning with the dividend upper rate. This rate applies to the outstanding balance of the loan at the nine-month date. It is not a charge on the interest element, it is a charge on the principal of the loan itself.

For example: if a director’s loan account shows an overdrawn balance of £100,000 at year-end and is still outstanding nine months later, the company faces a s455 charge of £33,750. This is a cash-flow cost that many owner-managed businesses are not adequately planning for.

Interaction with dividend treatment

A common approach is to declare a dividend at year-end to clear the directors’ loan account rather than actually repaying cash. This is legitimate provided:

• The company has sufficient distributable reserves to support the dividend
• The dividend is properly declared before the nine-month deadline
• Board minutes record the dividend declaration
• The dividend voucher matches the amount applied to clear the loan

HMRC scrutinises dividend-vs-loan reclassifications carefully. Where the company has no distributable reserves, purported dividends are unlawful and may be reclassified as loans (increasing the overdrawn balance) or as employment income (triggering PAYE and NIC). See our dedicated guide on directors’ loan account investigations for more on how HMRC investigates this.

Bed-and-breakfasting rules, ss464A–464D CTA 2010

Sections 464A to 464D CTA 2010 contain two separate anti-avoidance rules designed to prevent the mechanical cycling of loan balances to escape s455:

The 30-day rule (s464A)

If, within a period of 30 days:

• The participator repays an amount of £5,000 or more to the company; and
• A new loan of £5,000 or more is made to the same participator (or an associate)

…then the repayment is ignored for s455 purposes to the extent of the new lending. In practice, this means a director cannot repay £100,000 on 1 December and re-borrow £100,000 on 20 December to avoid the s455 charge due on 1 January.

The arrangement rule (s464B)

This is the broader catch-all. If, at the time a repayment is made, there is in existence an arrangement under which an amount will be lent to the same participator (or an associate) after the repayment, the repayment is ignored for s455 purposes. This rule is not limited by the 30-day window or the £5,000 minimum, it applies to any arrangement, however structured. HMRC can invoke it where the facts suggest a pre-planned cycling strategy.

The £15,000 threshold and intention conditions (ss464C–464D)

Where the total loans to all connected participators are below £15,000 and there is no arrangement to increase them above that amount, some of the anti-avoidance rules are disapplied. This £15,000 de minimis is narrow in practice and provides little relief for typical director borrowings.

How HMRC identifies undisclosed directors’ loan accounts

HMRC does not need to audit a company to identify a potential s455 issue. Its data matching and risk assessment tools mean it can identify companies at risk from:

• The CT600 corporation tax return and CT600A supplement, any s455 charge or loan balance must be disclosed here
• Year-on-year comparison of the balance sheet in the company’s accounts filed at Companies House, a growing “other debtors” or “directors’ current account” line is a red flag
• P11D returns, absence of a benefit-in-kind declaration on a known director loan is inconsistent
• Lifestyle mismatch analysis, if a director is living at a level inconsistent with their salary and dividend, HMRC looks for unexplained sources of funds including undisclosed drawings

Benefit-in-kind on interest-free loans

Separate from the s455 charge, if a director’s loan account exceeds £10,000 at any point during the tax year and the loan is interest-free (or carries interest below HMRC’s official rate), a benefit-in-kind arises on the director personally. The benefit is calculated as the difference between the interest the director actually paid and the interest that would have been due at HMRC’s official rate, applied to the average outstanding balance during the year.

The official rate for 2025/26 is 2.25% per annum (set annually by HMRC). The benefit must be reported on form P11D and the company must pay Class 1A NIC at 13.8% on the benefit value. The director includes the benefit on their self-assessment return and pays income tax at their marginal rate.

This is frequently overlooked where accountants focus on the s455 charge but fail to consider the separate P11D obligation. An omitted P11D for a director’s loan benefit is a common finding on HMRC employer compliance reviews.

Reclaiming s455 via L2P when the loan is repaid

The s455 charge is not a permanent cost. When the loan to the participator is repaid, the company is entitled to a repayment of the s455 tax previously paid. This is the “loan to participator” or L2P relief, claimed on the CT600A.

Key points on reclaiming s455:

• The repayment of s455 arises nine months after the end of the accounting period in which the loan was repaid (not immediately on repayment)
• If the loan was cleared by a dividend declaration rather than a cash repayment, the nine-month clock runs from the date of the dividend
• There is no time limit on making the repayment claim, but the longer it is left, the longer the company has suffered the cashflow cost
• The bed-and-breakfasting rules also apply to reclaims, HMRC will check that the repayment is genuine and not part of a cycling arrangement

Reclassification as remuneration

Where a directors’ loan account is overdrawn and cannot be repaid, HMRC may seek to reclassify the drawings as employment income rather than a loan. If successful, this triggers:

• PAYE income tax on the reclassified amount, charged through the PAYE system on the company
• Class 1 NIC (both employer’s and employee’s) on the amount
• Penalties on the PAYE and NIC, particularly if HMRC treats the non-operation of PAYE as deliberate

For directors in a personal liability investigation, a reclassification finding can simultaneously give rise to a PAYE Personal Liability Notice (Reg 72 PAYE Regs 2003), turning a company tax problem into a personal one. The interaction between s455, PAYE reclassification and PLNs is explored further in our pillar guide on director personal liability.

Tax-efficient repayment strategies

Where a directors’ loan account is overdrawn and the director wants to clear it, the most tax-efficient approach depends on the company’s and director’s individual circumstances. Common approaches include:

• Dividend declaration: Only possible if the company has distributable reserves. Most tax-efficient if the director has unused basic rate or dividend allowance capacity
• Bonus: Subject to PAYE/NIC but deductible for corporation tax, which partially offsets the NIC cost. More appropriate where distributable reserves are absent
• Genuine repayment from personal funds: Cleanest solution if the director has accessible personal assets; no tax cost beyond any gains realised to fund the repayment
• Write-off: The company can write off the loan, triggering a deemed dividend equal to the written-off amount under s415 ITTOIA 2005, plus the s455 charge becomes irrecoverable. Rarely the most efficient option but sometimes the only realistic one

HMRC investigation triggers

The s455 charge and associated DLA issues are a common starting point for wider HMRC investigations into owner-managed businesses. Specific triggers include:

• CT600A filed showing a s455 charge, HMRC may open an enquiry to verify the position and whether bed-and-breakfasting rules have been applied correctly
• Absence of a s455 charge where the balance sheet suggests a DLA, HMRC may ask why no charge was paid
• Missing or inconsistent P11D returns for a director’s loan benefit
• Year-on-year growth in the director’s current account balance with no corresponding dividend or repayment
• Discrepancy between lifestyle (property, vehicles, travel) and declared remuneration

A s455 enquiry frequently leads into a full DLA investigation, which in turn can lead to personal liability issues. Our guide to directors’ loan account investigations covers what to expect when HMRC opens this type of enquiry.

Interaction with loss relief

Where the company has carried-forward losses, these cannot be set against the s455 charge, s455 is not a charge on income or profits, so income or trading losses are irrelevant to it. Similarly, group relief cannot shelter a s455 liability. The charge must be paid in full (or the loan repaid) regardless of the company’s wider tax position.

Related guides

• Director personal liability: the complete guide
• Directors’ loan account investigations
• Defending a Personal Liability Notice
• All resources
• Our PLN defence service
• HMRC penalty calculator

Frequently asked questions