Director’s Loan Accounts and the Section 455 Charge
As a professional accountancy practice specialising in supporting small and medium-sized enterprises (SMEs), we often encounter questions from company directors about the complexities surrounding director’s loan accounts (DLAs) and the associated tax implications that arise. These rules can be challenging to navigate, and one particular aspect—the Section 455 charge—remains a common source of confusion for business owners. A thorough understanding of this charge is essential for effective tax planning and compliance in 2025.
A director’s loan account is created when a director either borrows funds from their company or lends money to it, resulting in a financial transaction recorded in the company’s accounts. Many SMEs utilise DLAs to manage working capital or facilitate temporary withdrawals. However, when a director’s loan account carries a debit balance—meaning the director owes money to the company—specific tax rules apply to prevent the misuse of company funds.
The statutory basis for these rules is Section 455 of the Corporation Tax Act 2010. This legislation imposes a corporation tax charge on loans made by close companies to their directors or shareholders if the loan remains outstanding nine months after the end of the company’s accounting period. HM Revenue & Customs (HMRC) has provided clear guidance on this matter, emphasising that the charge exists to discourage directors from withdrawing company funds without paying the appropriate tax on any benefit received.
In practical terms, if a director borrows money from their company and fails to repay the loan within the prescribed nine-month period after the company’s financial year-end, the company must pay a Section 455 tax charge. The current rate of this charge is 32.5% of the outstanding loan balance, consistent with the tax year 2024/25. While there are ongoing discussions about potential legislative changes, these rules remain in full effect in 2025. Consequently, it is crucial for company owners to monitor their director’s loan accounts diligently to avoid unexpected and unnecessary tax charges.
HMRC’s Corporation Tax Manual (CTM14320 onwards) clarifies that the Section 455 charge is designed as a temporary tax. Should the director subsequently repay the loan or if the company writes off the loan as a chargeable event, the company may reclaim the tax paid, subject to certain conditions. This mechanism illustrates that the charge primarily serves as a timing tool rather than a permanent tax burden. Nonetheless, accurate record-keeping and timely action are essential to managing this effectively.
For SMEs, the practical impact of the Section 455 charge is significant. It is common for smaller companies to use director’s loans for short-term finance; however, failure to clear these balances within the prescribed period can result in costly tax consequences. Additionally, outstanding director’s loan accounts may complicate dividend strategies and affect eligibility for tax reliefs such as Business Asset Disposal Relief. Therefore, careful planning around the company’s year-end and loan repayments is vital.
Our accountancy team advises clients to maintain comprehensive records of all transactions relating to their director’s loan accounts and to plan repayments strategically. We ensure that company records comply with the Companies Act 2006 and that all potential tax liabilities are identified and managed proactively.
It is also important to recognise that advances to directors through loan accounts that are not genuine loans—for example, disguised remuneration or benefits in kind—may trigger additional personal tax and National Insurance charges under other HMRC rules. This further underscores the importance of transparency and proper documentation in all dealings between a company and its directors.
In conclusion, director’s loan accounts continue to be a useful but potentially complex tool for SME owners in 2025. Understanding the Section 455 charge and its application is fundamental to avoiding unnecessary tax penalties. By partnering with a knowledgeable accountancy practice, directors can optimise their use of DLAs, ensure compliance with HMRC requirements, and protect the financial wellbeing of their business.
If you would like to discuss how we can help you manage director’s loan accounts or provide tailored advice on navigating the Section 455 charge, please contact us. Our expertise ensures that your company benefits from sound financial management and robust tax compliance.
Article Added:07/06/2025
