Overdrawn director's loan account: refinance options after the S455 rise

From 6 April 2026 the section 455 Corporation Tax rate on overdrawn director loans rose from 33.75% to 35.75%. The charge falls on balances still outstanding nine months and one day after the period end, and is recoverable only when the loan clears. For material balances, refinancing the loan into commercial debt is often cheaper in cash terms than letting the charge apply.

What S455 actually is

Section 455 of the Corporation Tax Act 2010 charges Corporation Tax on a loan from a close company to a participator, usually a director-shareholder, that remains outstanding nine months and one day after the company's accounting period end. From 6 April 2026 the rate is 35.75%, paid by the company alongside its main Corporation Tax. It is recoverable when the loan is repaid, written off or released, but only after the loan clears, not in the same period. So the real cost is 35.75% of the overdrawn balance held by HMRC for at least twelve months and usually longer.

When it applies

S455 applies if a director-shareholder owes the company money at the period end and the balance is still outstanding nine months and one day later. The charge is per period, so clearing the balance before the deadline avoids it for that period. Common triggers are drawing dividends ahead of declared profit, taking salary in advance of PAYE-able earnings, and paying personal expenses through the company without documentation. Separately, where the balance exceeds £10,000 at any point in the year, the loan is also a benefit in kind under section 175 ITEPA 2003, which triggers Class 1A National Insurance for the company plus an income-tax benefit on the director.

Refinance versus absorb

Three numbers drive the decision: the cash cost of S455 (35.75% of the balance held by HMRC for a year or more); the refinance rate available to the company; and the recoverable position, since the S455 comes back only slowly after the loan clears. For balances above roughly £15,000 with a clean-credit profile, refinancing the loan into a commercial term loan is usually cheaper in cash terms than letting the charge apply. For balances below the £10,000 benefit-in-kind threshold, the all-in cost of arrangement fees often makes absorption the cleaner answer. Lenders treat the use of funds by its underlying purpose, so the loan-clearance should be written into the use of funds and reflected in the management accounts. Where a recent decline has closed mainstream routes, the post-decline options set out the alternatives.

What not to do

Do not write off the balance informally, because a formal write-off is taxed as employment income or a distribution and usually costs more than the S455 it removes. Do not repay just before the deadline and re-draw straight after: the bed-and-breakfasting rules in section 464A CTA 2010 match any repayment within 30 days against new drawings of £5,000 or more, and the charge still applies. And do not use a company loan to clear an unrelated personal debt, because the new loan simply re-creates the S455 exposure.

Frequently asked questions

This is general information, not tax advice. Model both routes with your accountant before deciding. Last reviewed: 29 June 2026.