If you’re a company director (or closely connected to the director) and have ever borrowed money from your own business, there’s a specific tax rule you need to be aware of: Section 455.
This tax charge applies when a director’s loan remains unpaid after a certain deadline and is designed to stop directors from taking money out of a company without paying the right amount of tax
It’s not something every business will deal with, but if you run a close company (one controlled by a small number of shareholders), it’s important to understand how it works.
In this guide, we’ll explain when Section 455 tax applies, how much it costs, how to reclaim it, and the steps you can take to avoid it altogether.
What Is S455 Tax?
Section 455 tax is a Corporation Tax charge that applies when a company makes a loan to a director, shareholder or other participator, and that loan is not repaid within a specific timeframe. It is named after Section 455 of the Corporation Tax Act 2010.
The charge is temporary. If the loan is eventually repaid or written off, the tax can be reclaimed by the company. However, the business still has to pay the amount upfront to HMRC if the loan remains outstanding nine months after the end of the company’s accounting period.
The purpose of this tax is to prevent directors from taking money out of the company in the form of loans rather than properly declaring it as salary or dividends. Since loans are not taxed in the same way as income, this could otherwise result in significant tax avoidance.
When Does S455 Tax Apply?
Section 455 tax becomes payable when a loan or advance is made by a close company to a participator and that loan is not cleared by the deadline. The repayment must be made no later than nine months and one day after the end of the accounting period in which the loan was made.
For example, if your company’s year-end is 31 March 2025, any outstanding director’s loan must be repaid by 1 January 2026 to avoid the charge.
The rule applies not only to straightforward loans but also to indirect ones. If funds are channelled through a third party but still end up benefiting a participator, the tax may still apply. Similarly, loans made to family members or business partners may be caught by these rules if they are connected to someone who has control over the company.
What Is a Close Company and a Participator?
A close company is a company that is based in the UK and controlled by five or fewer participators, or by any number of directors who are also shareholders. In practical terms, most small private limited companies fall into this category.
A participator is anyone who has a share in the capital or income of the company. This includes directors, shareholders and sometimes loan creditors or other individuals who benefit from the company’s finances.
Associates of participators, such as family members or business partners, can also be affected in some circumstances.
Because of these definitions, Section 455 tax applies to a wide range of company structures and relationships. That’s why it’s important for directors and business owners to understand how their actions could trigger the charge, even unintentionally.
S455 Tax Rate and How It’s Calculated
What Is the S455 Tax Rate in 2025?
As of 2025, the Section 455 tax rate stands at 33.75%. This rate applies to any directors’ loans made on or after 6 April 2022 that remain outstanding beyond the repayment deadline.
The rate mirrors the higher rate of dividend tax, which is deliberate, as HMRC wants to discourage company owners from extracting funds through loans rather than dividends.
Before April 2022, the S455 tax rate was 32.5%, in line with the old dividend rate. The increase reflects wider changes to dividend taxation that were brought in to align the treatment of different forms of income.
It’s important to note that this is not a permanent tax. If the loan is later repaid in full, the company can claim back the S455 charge. However, the initial payment to HMRC must still be made on time to avoid penalties or interest.
Example: Calculating S455 Corporation Tax
Let’s say a director borrows £10,000 from their company and does not repay it within the nine-month deadline. This would trigger an S455 tax liability.
The tax charge would be calculated as 33.75% of the outstanding balance. In this case, the amount due to HMRC would be £3,375. This is payable by the company, not the individual, and is treated separately from the director’s personal tax position.
If the loan is later repaid in full, the company can submit a claim to HMRC for the full £3,375.
However, there can be a significant delay in receiving the refund, depending on when the repayment is made and the timing of the claim.
How and When to Pay S455 Tax
How Is S455 Tax Paid?
Section 455 tax is paid alongside your company’s Corporation Tax bill. When submitting the CT600 return, the outstanding loan amount must be disclosed on the CT600A supplementary page. This is where HMRC will assess whether the S455 tax applies and calculate the liability due.
While the tax is considered part of the company’s Corporation Tax obligations, it is not deducted from profits. Instead, it applies to the loan balance itself, which makes it a separate charge rather than a profit-based tax.
Your accountant or tax adviser will usually include this calculation as part of your annual accounts, but it’s important to make sure any outstanding director’s loans are correctly flagged, as HMRC can impose penalties for late payment or underreporting.
When Is S455 Corporation Tax Due?
For most small companies, S455 tax is due nine months and one day after the end of the relevant accounting period. This is the same deadline used for standard Corporation Tax.
For example, if your company’s year-end is 31 December 2025, then the S455 charge on any unpaid director’s loan from that year would be due by 1 October 2026.
Larger companies with profits over £1.5 million may need to pay Corporation Tax (including any S455 charge) in quarterly instalments.
These deadlines are more complex and depend on your company’s specific profit levels and structure, so professional advice is recommended if your company falls into this bracket.
Prompt and accurate payment of S455 tax ensures your business avoids unnecessary fines and interest, and sets the clock ticking for a potential reclaim if the loan is later repaid.
How to Reclaim S455 Tax
When Can You Reclaim S455 Tax?
Although the Section 455 tax is a charge imposed on the company, it is not intended to be a permanent tax. It is essentially a holding charge that HMRC applies when a director or participator borrows money from the company and fails to repay it within the required timeframe.
Once the loan has been fully repaid, written off, or reclassified (for example, treated as a dividend and taxed accordingly), the company becomes eligible to reclaim the S455 tax it previously paid. However, even after repayment, the refund cannot be claimed straight away.
HMRC requires companies to wait nine months and one day from the end of the accounting period in which the loan was cleared.
This means there can be a significant delay between repaying the loan and receiving the refund, depending on the timing of the repayment and your company’s financial year-end.
How to Reclaim S455 Tax from HMRC
Reclaiming S455 tax is done by the company, not the individual who took out the loan. This distinction is important because even though the charge arises from a director’s loan, the payment and reclaim process remain the responsibility of the company itself.
If the repayment was made within the current accounting period or one of the previous two, the reclaim can be processed through your Corporation Tax return by completing the CT600A supplementary pages.
This allows HMRC to assess the outstanding loan position and determine the amount of S455 tax eligible for repayment.
For older loans that were repaid more than two accounting periods ago, the company will need to submit a separate form called L2P.
This form should be sent directly to HMRC’s Corporation Tax Services team and is often accompanied by supporting documentation to confirm the repayment.
It’s worth noting that the repayment process can be slow. HMRC does not always process S455 tax refunds quickly, so companies should be prepared for a delay.
Keeping clear records of when loans were made and repaid, and ensuring the correct documentation is submitted, can help reduce friction and ensure the reclaim is successful.
Exceptions and Exemptions
Situations Where S455 Tax Doesn’t Apply
There are several circumstances where a loan from a close company to a participator won’t trigger an S455 tax charge. The most straightforward is when the loan is repaid in full within nine months and one day of the company’s year-end.
As long as the repayment is made within this window, no charge arises and nothing needs to be paid to HMRC.
Loans may also be exempt from S455 tax if they fall under certain qualifying conditions. For example, if the loan is £15,000 or less, made to a full-time employee who does not hold a material interest in the company, it will usually be exempt.
This exemption is designed to allow for small, temporary loans to staff without triggering a tax charge, provided they aren’t shareholders or close associates of the company owners.
In some cases, loans made during the normal course of business may also be excluded. This can apply to companies that operate as lenders or finance providers. Similarly, trade credit balances, such as amounts owed for goods or services, are not caught by the rules, provided they are settled within six months and are not structured as a loan.
It’s important to assess the purpose and structure of each loan to determine whether the S455 rules apply. Misclassifying a loan or assuming it qualifies for an exemption could lead to unexpected tax charges and penalties.
Cheap or Interest-Free Loans
While some loans may avoid an S455 tax charge, they could still have other tax consequences. If a director or employee receives an interest-free or low-interest loan from the company, and the balance exceeds £10,000 at any point during the tax year, this may give rise to a benefit-in-kind.
In this case, the value of the benefit would be based on the difference between the interest paid and the official rate set by HMRC, which is recalculated quarterly.
The individual receiving the loan would be liable to pay income tax on the benefit, and the company would also be responsible for paying Class 1A National Insurance, at 15% for 2025/26.
This is a separate issue from S455 tax, but it is one that often overlaps, particularly where directors borrow larger amounts from the company and leave them unpaid for an extended period.
Ensuring that any loan agreements are properly documented, interest is charged where appropriate, and the values stay below the benefit-in-kind threshold can help you avoid these additional tax consequences.
Avoiding Common S455 Pitfalls
Bed and Breakfasting Rules (30-Day Rule)
One of the more well-known avoidance tactics that HMRC has clamped down on is known as “bed and breakfasting.” This is where a loan is repaid shortly before the end of the nine-month deadline to avoid the S455 charge, only to be taken out again just after.
HMRC’s 30-day rule prevents this by treating any repayment followed by a similar loan within 30 days as if no repayment had occurred at all. This means the original loan is still considered outstanding, and the S455 tax remains payable.
The rule is specifically aimed at directors or shareholders who attempt to cycle funds in and out of the company to avoid triggering the tax. Even if the loan is technically repaid and reissued, HMRC will ignore the repayment and apply the tax charge as if the money was never returned.
The £15,000 Arrangements Rule
In cases where the 30-day rule doesn’t apply, HMRC can still catch out directors with the £15,000 arrangements rule. This applies where the balance of a loan is at least £15,000 and the repayment is made with a plan in place to borrow again at a later date.
Unlike the 30-day rule, this test is not strictly time-bound. It looks at the intention and surrounding circumstances, such as whether the repayment was made solely to clear the loan before the tax deadline with a view to withdrawing similar funds soon after.
If HMRC believes that the repayment was not genuine or was made with a view to accessing company funds again later, the S455 tax will still apply, even if the loan was technically repaid.
This rule is broader and more subjective, which means directors need to be careful when repaying large loans, especially where there is an expectation of future borrowing.
Multiple Loans and HMRC Aggregation
Another common mistake is assuming that separate loans to the same individual are treated individually. In reality, HMRC often views multiple loans as a combined balance, particularly when they are not clearly documented or where separate accounts are not maintained.
If one loan is repaid but others remain outstanding, or if new loans are issued without resolving existing ones, HMRC may take the view that the repayment was not genuine and apply the S455 charge to the full balance.
This is especially relevant in small businesses where the director might dip into the company account multiple times over the year. Good recordkeeping is key. Each loan should be tracked separately with accurate dates, amounts, and repayment details, to avoid being caught out by aggregation rules.
What Happens If the Loan Is Written Off or the Company Closes?
Loan Write-Offs and Tax Treatment
If a director’s loan is formally written off by the company, it is no longer repayable, but that doesn’t mean it escapes tax altogether. From a tax perspective, the amount written off is treated as income, typically in the form of a dividend if the borrower is a shareholder.
This means the individual will need to pay income tax on the amount written off, at their marginal rate. If they’re in the basic, higher or additional tax bands, the tax will be charged accordingly.
In addition to this, if the director is also an employee, the written-off loan may trigger a National Insurance liability. The amount will be treated as earnings for Class 1 NIC purposes, which means both the company and the individual may have to pay NIC on the value of the loan.
Writing off a loan should not be seen as a tax-free option. While it removes the obligation to repay the money, it replaces it with a personal tax bill that could be higher depending on the individual’s tax position.
Insolvency or Liquidation Situations
If the company becomes insolvent or enters liquidation while a director’s loan is still outstanding, the situation can become more complex.
Liquidators are responsible for recovering as much value as possible for creditors, and this includes calling in any outstanding director’s loans. If you owe the company money when it closes, you may be personally liable to repay it.
In some cases, the loan may be treated as personal income, particularly if there is no realistic chance of recovery through repayment. This could result in additional income tax or National Insurance liabilities for the director.
Furthermore, the S455 tax charge may still apply if the loan was outstanding at the end of the relevant accounting period. Even if the company later closes, the liability may remain unless the loan is settled beforehand.
This underlines the importance of managing director loans carefully, especially in the lead-up to insolvency or if you are planning to close the company voluntarily.
S455 Tax and Directors’ Loan Accounts (DLAs)
Director’s Loan Accounts (DLAs) are often used by directors of small companies to take money out of the business before dividends are declared or salaries are paid. However, without proper management, they can quickly lead to unintended tax consequences.
Accurate and up-to-date bookkeeping is essential. Every transaction should be recorded clearly so it’s easy to see whether a director owes money to the company, or vice versa. Even small, routine withdrawals can build up over time and result in a DLA being overdrawn.
If you intend to offset a loan balance with dividends, make sure dividends are properly declared, supported by adequate profits, and documented in board minutes. Declaring a dividend after the end of the accounting period will only impact the S455 tax if declared within 9 months and retained in the DLA.
What may seem like minor cash flow movements can trigger a significant tax charge if left unchecked. Reviewing your DLA regularly and getting advice early can help you stay within HMRC’s rules and avoid unnecessary charges.
S455 Tax for FAQs
What is S455 tax?
Section 455 tax is a Corporation Tax charge applied when a close company lends money to a director or shareholder (a “participator”) and the loan isn’t repaid within nine months and one day after the end of the company’s accounting period.
What is the S455 tax rate in 2025?
For loans made on or after 6 April 2022, the S455 tax rate is 33.75%, aligned with the higher dividend tax rate.
Who pays S455 tax – the company or director?
The company is responsible for paying the S455 tax, not the individual. However, it arises because of a loan made to the director or shareholder.
When does S455 tax apply?
It applies if a close company makes a loan to a participator that remains unpaid beyond the nine-month deadline after the year-end. It can also apply to loans made indirectly, such as through associates or partnerships.
Can you reclaim S455 tax from HMRC?
Yes. Once the loan is fully repaid, written off, or cleared via dividend or salary, the company can apply to reclaim the tax. However, this can only be done after a waiting period of nine months and one day from the end of the accounting period in which the repayment took place.
How do I reclaim S455 tax?
If the repayment occurred within the current or previous two accounting periods, the reclaim can be submitted through the company’s Corporation Tax return using the CT600A form. If it falls outside that window, a separate claim must be submitted to HMRC using form L2P.
Can I avoid S455 tax by paying dividends?
Dividends can be used to clear a director’s loan balance, but they must be properly declared and backed by sufficient company profits. Timing is important, the dividend must be declared before the end of the nine-month period, or the S455 charge may still apply.
What is the 30-day bed and breakfasting rule?
This rule prevents directors from avoiding S455 tax by repaying a loan just before the deadline and taking a new one shortly after. If a repayment and a new loan of £5,000 or more occur within 30 days, HMRC treats it as if the original loan was never repaid.
What happens if a participator’s loan is written off?
If the company decides not to collect the loan, the amount written off is treated as a dividend and taxed as income in the hands of the shareholder. If the participator is also an employee, the amount may also be subject to National Insurance.
Does S455 tax apply if the company is dormant or closing?
Yes. If a loan is still outstanding when the company closes, the S455 tax may still apply. Liquidators can also pursue directors for repayment of overdrawn loan accounts as part of the winding-up process.
Is unpaid share capital subject to S455 tax?
No. Unpaid share capital is not treated as a loan for the purposes of Section 455 and is therefore not subject to the tax. This has been supported in past case law.
How Ryans Can Help with S445
Understanding the rules around S455 tax can be complex, especially when director loans are used regularly as part of your company’s cash flow. At Ryans, we help businesses manage their DLAs carefully to avoid unexpected charges and keep tax bills under control.
Our team can assist with Corporation Tax planning, preparing accurate CT600 returns, and ensuring your directors’ loan accounts are compliant. If you’ve already paid S455 tax and need help reclaiming it, we’ll guide you through the process and deal with HMRC on your behalf.
We also provide preventative advice, helping you understand what’s allowable and how to structure transactions properly. That way, you can focus on running your business with confidence that your finances are being handled correctly.
Ready to speak to a tax expert?
Get in touch with the team at Ryans today and let us help you.