In many personal or family-run companies, it’s common for directors to borrow money from their company.
But if that loan isn’t repaid within a certain timeframe, the company may have to pay an additional tax known as Section 455 tax.
With dividend tax rates increasing from April 2026, the rate of Section 455 tax will increase too. This means the timing of a director’s loan could affect how much tax the company pays.
Let’s look at how the rules work and why timing may matter.
What Is Section 455 Tax?
Section 455 tax applies when a close company lends money to a director or shareholder (known as a participator).
Most owner-managed or family companies fall into this category.
If the loan remains outstanding on the corporation tax due date, the company must pay tax on the balance.
Corporation tax is normally due nine months and one day after the end of the accounting period.
So if a loan hasn’t been repaid by that date, Section 455 tax becomes payable.
Is Section 455 Tax Permanent?
Unlike most taxes, Section 455 tax is temporary.
Although it must be paid alongside the company’s corporation tax bill, the amount can later be reclaimed once the loan is repaid.
The repayment is usually made nine months and one day after the end of the accounting period in which the loan is cleared.
However, while the tax is temporary, it can still create a cashflow impact for the company.
Section 455 Tax Rates Are Increasing
The rate of Section 455 tax is linked to the dividend upper tax rate.
For 2025/26, the rate is 33.75%.
From 6 April 2026, the rate will increase to 35.75%.
That means loans taken after this date could result in a higher Section 455 tax charge if the loan remains outstanding.
Why Timing a Director’s Loan Can Matter
If a director is planning to take a loan from the company and expects it to remain outstanding past the corporation tax due date, taking the loan before April 2026 may reduce the tax payable.
The difference is 2% of the outstanding loan balance.
This may not sound like much, but it can quickly add up for larger loans.
Example: How Timing Could Save Tax
Let’s look at a simple example.
Andrew owns A Ltd, his personal company, which prepares accounts to 30 June each year.
Andrew plans to take a £30,000 loan from the company in April 2026 and repay it in 2028 when a savings policy matures.
Because the loan will still be outstanding when the company’s corporation tax is due, Section 455 tax will apply.
If Andrew takes the loan on 30 April 2026, the company will pay:
- £10,725 in Section 455 tax
(£30,000 × 35.75%)
However, if he takes the loan slightly earlier on 31 March 2026, the tax becomes:
- £10,125 in Section 455 tax
(£30,000 × 33.75%)
By taking the loan before the tax rate increase, the company saves £600 in tax.
Clearing Director’s Loans
When repaying loans, it can also make sense to prioritise loans with the highest Section 455 tax rate first.
This is because the repayment reclaim will be larger.
Careful planning around director loans, dividends, and tax rates can help ensure the most tax-efficient outcome.
Final Thoughts
Director loans can be useful for short-term cashflow, but they come with tax rules that need careful consideration.
With Section 455 tax rates increasing from April 2026, the timing of loans could affect how much tax your company pays.
If you’re thinking about taking a director’s loan, it’s worth reviewing the timing and tax implications first.
Need Advice on Director Loans or Tax Planning?
If you run a limited company and want to make sure you’re managing director loans and tax efficiently, we’re here to help.
At Jon Davies Accountants, we support business owners across the UK with practical tax planning and financial advice.
Get in touch with Jon or the team today if you’d like help reviewing your director’s loan position or planning ahead before the April tax changes.
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