If you are a director of an owner-managed business, you may already be aware of the income tax and National Insurance changes taking effect this April. However, one increase that could easily be overlooked is the rise in the Section 455 (S455) tax charge on overdrawn director’s loan accounts.
Here is what is changing, what it means for your business, and what you can do about it.
What is an overdrawn director’s loan account?
A director’s loan account records money that passes between a director and their company. If you draw more from the company than you have put in or been formally paid, the account becomes overdrawn — meaning, in effect, that the company has lent you money.
This is common in owner-managed businesses and is not in itself a problem, but it does carry tax implications that are important to manage carefully.
What is the S455 charge?
If a director’s loan account remains overdrawn nine months and one day after the company’s accounting year end, HMRC charges the company a tax under Section 455 of the Corporation Tax Act 2010. The charge is calculated as a percentage of the outstanding loan balance.
The S455 charge is temporary — it is repaid to the company once the loan is cleared — but it must be paid to HMRC in the interim and can represent a significant cash flow cost if not planned for.
What is changing in April 2026?
The S455 rate is linked to the dividend upper rate. As dividend tax rates are increasing from 6 April 2026, the S455 rate is rising with them.
From 6 April 2026, the S455 rate for close companies will increase from 33.75% to 35.75%.
For context, the rate history is as follows:
- Loans taken out before 6 April 2022: 32.5%
- Loans taken out on or after 6 April 2022: 33.75%
- Loans taken out on or after 6 April 2026: 35.75%
The rate that applies to a loan is determined by when it was taken out.
To put this in practical terms: on an overdrawn balance of £50,000, the S455 charge under the new rate would be £17,875, compared to £16,875 under the current rate. While the charge is ultimately repayable, that is money sitting with HMRC rather than in your business.
What should you do now?
If your director’s loan account is currently overdrawn, or is likely to be overdrawn at your next year end, it is worth reviewing your position before your year end arrives. Depending on your circumstances, options may include:
- Declaring a dividend to clear the balance (subject to available retained profits)
- Adjusting your salary arrangements
- Making a direct repayment of the loan
Each of these carries its own tax and commercial considerations, and the right approach will depend on your individual situation. Taking advice before the year end gives you the most flexibility.
