Section 455 Tax on Directors' Loans
The 33.75% charge on overdrawn directors' loan accounts — how it works, the deadline that triggers it, how to avoid it, and how to reclaim it once the loan is repaid.
A Section 455 charge often lands when cash is already tight. This guide accompanies our business turnaround finance hub, where we explain how emergency funding can clear a director's loan before the deadline.
Section 455 Tax on Director Loans
Section 455 Corporation Tax applies when a company makes a loan to a participator (typically a director or shareholder) that remains outstanding nine months and one day after the company's accounting period ends. This creates an immediate tax liability of 33.75% of the outstanding loan amount.
How Section 455 Works
- • Tax charge: 33.75% of the outstanding loan balance
- • Due: Nine months and one day after year-end
- • Applies to loans to directors, shareholders, and participators
- • Additional charge on top of any other taxes owed
- • Creates immediate cash crisis for already struggling companies
Avoiding and Reclaiming the Charge
- • Avoid the charge: Repay the loan before the nine-month-and-one-day deadline
- • Reclaim tax: Once loan is repaid, company can reclaim the tax paid
- • Reclaim is not automatic - must be claimed from HMRC
- • Cannot reclaim until nine months after the repayment date
- • Anti-avoidance rules prevent "bed and breakfasting" schemes
Example Scenario:
Director has an overdrawn loan account of £100,000. If not repaid within nine months and one day after year-end, the company must pay £33,750 in Section 455 tax to HMRC. For a distressed business already struggling with cash flow, this additional burden can be catastrophic.
Turnaround finance solution: Emergency funding can be used to repay the director loan before the deadline, avoiding the 33.75% tax charge and preserving precious working capital for business recovery. If the tax debt has already accumulated, we can help negotiate HMRC Time to Pay arrangements as part of your recovery strategy.
Section 455 Tax FAQs
What is Section 455 tax?
Section 455 is a Corporation Tax charge of 33.75% on a loan made by a close company to a participator (typically a director or shareholder) that remains outstanding nine months and one day after the company's accounting period ends. It is designed to discourage directors from extracting funds as untaxed loans rather than salary or dividends.
How do I avoid the Section 455 charge?
Repay the loan in full before the nine-month-and-one-day deadline after your year-end. Where cash is tight, turnaround finance can be used to clear the director's loan in time and preserve working capital. Anti-avoidance rules prevent "bed and breakfasting" — repaying just before the deadline and re-drawing shortly after.
Can I reclaim Section 455 tax once it's paid?
Yes. Once the loan is repaid, written off or released, the company can reclaim the Section 455 tax from HMRC. The reclaim is not automatic and cannot be made until nine months and one day after the end of the accounting period in which the loan was repaid.
Facing a Section 455 charge with limited cash?
Emergency funding can clear an overdrawn director's loan before the deadline and avoid the 33.75% charge. See our business turnaround finance guide, or talk to K2 directly.