When a close company advances funds to a director or shareholder, it establishes a director’s loan. The legislation heavily regulates these arrangements to prevent individuals from extracting corporate funds without suffering Income Tax. Handling the director’s loan correctly requires navigating two distinct tax regimes: the Corporation Tax charge on the company, and the Income Tax (benefit in kind) charge on the individual.
The Section 455 Charge for Companies (2026/27)
Under Section 455 of the Corporation Tax Act 2010 (CTA 2010), if a close company makes a loan or advances money to a relevant person who is a participator in the company, the company must pay a temporary tax charge.
The statute links the Section 455 tax rate directly to the dividend upper rate specified for the tax year in which the loan is made. For loans made on or after 6 April 2026 (the 2026/27 tax year), the dividend upper rate increases to 35.75%. Therefore, any new director’s loan drawn in the 2026/27 tax year triggers a 35.75% corporate tax charge on the outstanding balance.
There is due from the company, as if it were an amount of corporation tax chargeable on the company for the accounting period in which the loan or advance is made, an amount equal to such percentage of the amount of the loan or advance as corresponds to the dividend upper rate… for the tax year in which the loan or advance is made.”
The company must pay this Section 455 tax to HMRC nine months and one day after the end of the accounting period in which it made the loan.
Table: Key Section 455 Metrics for 2026/27
| Metric | 2026/27 Rate / Rule | Relevant Legislation |
|---|---|---|
| Section 455 Tax Rate | 35.75% | s 455 CTA 2010 |
| Payment Deadline | 9 months after the accounting period ends | s 455(3) CTA 2010 |
| Dividend Ordinary Rate (Write-offs) | 10.75% | s 8 ITA 2007 |
Reclaiming the Tax: Repayment and Relief
The Section 455 charge acts as a temporary deposit rather than an absolute tax. Under Section 458 CTA 2010, the company can claim relief from the tax if the director repays the loan, or if the company formally releases or writes off the debt.
However, HMRC defers the relief. The company cannot obtain the refund until nine months after the end of the accounting period in which the repayment or write-off actually occurred. Furthermore, the company must claim this relief within four years from the end of the financial year in which the repayment or release takes place.
Anti-Avoidance: “Bed and Breakfasting”
To prevent directors from temporarily repaying loans just before the nine-month deadline only to immediately redraw the funds, HMRC enforces strict anti-avoidance rules. Recent updates to the Targeted Anti-Avoidance Rule (TAAR) ensure that where companies and their shareholders attempt to avoid the Section 455 charge using “bed and breakfasting” arrangements, the tax remains payable regardless of any apparent short-term repayment.
Benefit in Kind: The Official Rate of Interest
From the director’s perspective, an interest-free or low-interest loan creates an employment benefit in kind under Section 175 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
A loan constitutes a “taxable cheap loan” if the director pays no interest, or pays interest at a rate lower than the “official rate” set by the Treasury. For the 2026/27 tax year, the official rate of interest sits at 3.75% (effective from 6 April 2025). Notably, following the Autumn Budget 2024, HMRC abolished the commitment to hold the official rate static for the entire tax year; the rate may now fluctuate in-year to reflect broader economic changes.
If the director does not pay interest at or above 3.75%, the company must calculate the cash equivalent of the benefit (the difference between the interest payable at the official rate and the interest actually paid) and report it on a P11D, subjecting the director to Income Tax and the company to Class 1A National Insurance.
Tax Consequences of Writing Off a Director’s Loan
If the company chooses to release or write off the director’s loan, the company can reclaim its Section 455 tax under Section 458 CTA 2010.
However, the write-off triggers a severe personal tax charge for the director. Section 415 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) taxes the written-off amount as dividend income. For the 2026/27 tax year, this means the written-off amount is taxed at the dividend ordinary rate of 10.75% (for basic rate taxpayers), or the higher dividend rates depending on the individual’s marginal tax band.
Consider reviewing the specific mechanics of the TAAR introduced in Finance Bill 2024-25 to ensure clients do not inadvertently trigger denied relief when restructuring short-term corporate advances.
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