- Section 455 tax applies when an overdrawn director loan remains unpaid nine months after year-end.
- The tax rate is 33.75 percent on older loans, and 35.75 percent on loans taken after 6 April 2026.
- Once the debt is repaid, the firm can reclaim the tax paid from HMRC.
In the UK, directors loan account s455 tax is a Corporation Tax charge on money borrowed from a close business by a director. When you take out more firm cash than you put in, the account becomes overdrawn. If this balance stays unpaid nine months and one day after year-end, the firm owes Section 455 tax to HMRC.
This financial guide is for UK limited company directors, shareholders, and owner-managers. An overdrawn account is not free money. Open debts tie up cash.
Leaving an open balance adds steep tax charges. It also triggers strict reporting on annual tax returns. Plan ahead.
What triggers directors loan account S455 tax?
A director loan account tracks all money moving between a director and their firm. If you pay business costs with personal funds, the firm owes you cash. But when you draw money for personal use that is not salary or a dividend, your account becomes overdrawn. Watch the balance.
HM Revenue and Customs treats an overdrawn balance as a credit advance to a shareholder. If you clear the full sum before your financial year closes, no tax arises. No bill arrives. After year-end, you still have a grace period of nine months and one day. You can clear the balance with cash or declare a valid dividend.
Problems start when the debt stays unpaid past that statutory date. The business must then pay Section 455 tax at 33.75 percent on older balances, or 35.75 percent on funds drawn after 6 April 2026. Pay on time. The firm pays this bill directly to HMRC alongside normal Corporation Tax.
The nine-month repayment deadline and CT600A filing
The nine-month and one-day deadline matches your Corporation Tax payment date. For example, say your accounting year ends on 31 December. Mark the date. Any overdrawn balance must be cleared by 1 October of the next year.
Every close firm with an overdrawn balance must complete supplementary form CT600A with its annual tax return. File form CT600A. You must declare the original advance, any amounts cleared during the period, and any balance remaining unpaid at the payment deadline.
Failing to declare an overdrawn sum brings penalties and interest charges. Penalties add up fast. If you already maintain a four-week cash-flow forecast, watching ledger movements stops surprise bills before the accounting window closes.
Avoiding the 30-day bed and breakfasting trap
In the past, some directors cleared their debt just before the nine-month deadline, only to draw the same money back a few days later. HMRC created strict anti-avoidance rules to block this move, known as bed and breakfasting. Tax rules stay strict.
Under these rules, say you clear a debt of £5,000 or more. If you draw £5,000 or more back out within 30 days, HMRC ignores the repayment for tax purposes. Rules catch fast moves. The old balance counts as unpaid, triggering the full Section 455 charge.
A second rule catches credit advances over £15,000 where an agreement exists to withdraw cash again. Check big loans. To clear an overdrawn account safely, payments must come from genuine personal funds, salary subject to PAYE, or voted dividends from retained profits.
Timeline and repayment scenarios for company directors
Managing an overdrawn balance requires matching accounting dates with statutory filing deadlines. Key dates drive compliance. The schedule below shows how Section 455 tax applies across key milestones for a business with a December year-end.
Labelled example: Corporation Tax Section 455 timeline and repayment scenarios for an overdrawn loan balance.
| Accounting Milestone | Calendar Date | Loan Account Position | Section 455 Status | Action Required by Company |
|---|---|---|---|---|
| Accounting Year-End | 31 December | £20,000 overdrawn balance | No tax due yet | Calculate total net advances on balance sheet. |
| Nine-Month Window | 1 January to 30 September | Director repays £12,000 | Tax charge reduced | Document repayment source in company books. |
| Statutory Due Date | 1 October (9 months + 1 day) | £8,000 remains unpaid | 35.75% tax applies (£2,860) | Pay £2,860 to HMRC with Corporation Tax bill. |
| Tax Return Filing | By 31 December | £8,000 historical debt | Declared to HMRC | Submit form CT600A alongside company CT600. |
| Subsequent Repayment | 15 March following year | Director clears remaining £8,000 | Eligible for full refund | File form L2P to reclaim £2,860 tax deposit. |
Review the payment date row. Because £8,000 remained open past 1 October, the company paid £2,860 to HMRC. Check that number. That payment remains on deposit until the company formally reclaims it after clearing the debt.
When drafting formal commercial terms, as discussed in our commercial payments checklist, keeping corporate funds separate from personal cash protects liquidity across the trading year. Keep accounts apart.
Benefit in kind rules for balances over ten thousand pounds
Section 455 tax is paid by the business, not by the director personally. The company pays it. But personal tax rules apply if the total borrowed sum exceeds £10,000 at any point in the tax year.
When an overdrawn balance tops £10,000 and the firm charges no interest, HMRC treats the arrangement as an employment benefit in kind. The firm must report the advance on form P11D. Forms must go in. It must pay Class 1A National Insurance at 13.8 percent on the notional interest value.
The director must also declare the interest benefit on their Self Assessment return. Tax returns must match. Tracking these limits alongside our guide on VAT registration rolling twelve months keeps your wider business liabilities fully compliant.
Reclaiming Section 455 tax after repayment
Section 455 is not a permanent levy. It functions as a temporary deposit held by HMRC to discourage disguised wage drawings. You get it back. Once you clear the balance in full, your firm can reclaim every penny of the tax paid.
However, reclaiming the money takes time. HMRC does not refund the money right away. Waiting takes patience. Relief is due nine months and one day after the end of the accounting period in which the debt was cleared.
To claim the refund, file form L2P or claim relief through your online tax return. Claims take care. Keeping clean banking records, as set out in our guide on how long to keep business records, speeds up HMRC checks so your refund arrives without dispute.
Sources and scope
GOV.UK: Director Loans and Personal Responsibilities · GOV.UK: Director Loans and Corporation Tax (Section 455) · GOV.UK: Pay Your Corporation Tax Bill. This article provides general financial guidance for UK limited company directors. Rules can change. Consult a certified chartered accountant or tax advisor for advice on your specific circumstances.