Imagine you run a successful software development company with a June year-end. In July 2024, you personally borrowed £50,000 from the company to put towards a house deposit. You intended to repay it quickly, but the project pipeline dried up and you did not. That is exactly when Section 455 of the Corporation Tax Act 2010 steps in, and it can be a shock to the unprepared.
Section 455 is a tax charge levied on a close company (broadly, one under the control of five or fewer shareholders) when it makes a loan to a director or shareholder that remains outstanding nine months after the end of the accounting period in which the loan was made. For the 2025/26 tax year, the rate is 33.75% of the loan amount. Crucially, this is not a penalty. It is a refundable deposit. Once the director repays the loan, the company can reclaim the tax from HMRC.
A common pitfall: the overdrawn director's loan account
Many business owners assume a formal loan agreement is required for Section 455 to bite. It is not. HMRC treats any debit balance on a director's loan account as a loan. If you take drawings that exceed your salary and dividend entitlements, and that balance is not cleared within the nine-month window, the charge applies. Even unpaid dividends credited to your account but left sitting there can be caught.
How the mechanics work with a real example
Take a manufacturing SME with a 31 March year-end. On 1 April 2024, the sole director borrows £30,000. The nine-month deadline is 31 December 2024 (nine months after 31 March 2024). If the loan is still outstanding on 1 January 2025, the company must pay £10,125 (33.75% of £30,000) to HMRC, typically as part of its corporation tax payment due nine months and one day after the year-end (so by 1 January 2025). If the director repays the loan on 1 June 2025, the company can claim the £10,125 back as a reduction in its corporation tax liability for the period ending 31 March 2026.
Interest and exceptions
If the Section 455 tax is paid late, HMRC charges interest from the original due date until the date of repayment of the loan. The rate is set quarterly and is currently around 7.75% for underpayments. There are two key exceptions to the charge. First, loans of £15,000 or less to a director who works full-time for the company and owns no more than 5% of the shares are exempt. Second, loans made in the ordinary course of the company's business (for example, a trade credit account for a director who is also a customer) are not caught.
What you should do
For any limited company director, the safest approach is to plan withdrawals carefully. Structure remuneration as salary or dividends wherever possible, and if you must take a director's loan, ensure it is repaid within nine months of your accounting year-end. If repayment within that window is impossible, recognise that the company will face a cash flow hit of 33.75% of the loan amount until the money comes back. A formal loan agreement with a repayment schedule can help, but it does not alter the tax treatment. Always check your director's loan account balance before your year-end and again nine months afterwards.