It’s not uncommon for directors of small or family-run businesses to borrow money from their companies. But what happens when that loan doesn’t get repaid? Writing off a director’s loan might seem like a simple solution, but it comes with a range of tax and National Insurance consequences — both for you and your company.
Let’s take a look at what you need to consider before hitting the write-off button.
When Does a Tax Charge Apply?
If a director’s loan is still outstanding nine months and one day after the company’s accounting year-end, the company faces a tax charge. This is known as Section 455 tax — and it’s something you’ll definitely want to avoid if you can.
But what if the loan is eventually written off? That’s where things get a bit more complicated.
What HMRC Is Saying
HMRC recently sent letters to individuals who had a director’s loan written off between 6 April 2019 and 5 April 2023, but who might not have declared the amount as income on their Self Assessment return.
If this applies to you, you’ll need to use HMRC’s online disclosure service to put things right. You can find more info on how to do that here:
Tell HMRC about underpaid tax from previous years
For loans written off after 5 April 2023, there’s no need to use the disclosure service — you can simply amend your Self Assessment return.
What This Means for Your Company
If the company already paid Section 455 tax on the loan, the good news is that writing it off is treated like the loan being repaid — so the company can reclaim the tax.
But here’s the catch:
- You can’t make the claim right away.
- You’ll need to wait until nine months and one day after the end of the accounting period in which the loan was written off.
- The reclaim must be included in the company’s CT600 tax return (supplementary pages).
You can make the claim online here:
Reclaim tax paid by close companies on loans to participators
What This Means for You (the Director)
As the director, the amount written off is classed as a distribution — basically, it’s taxed just like a dividend.
So, you’ll need to:
- Include it in your Self Assessment return
- Expect to pay dividend tax rates on it
If you’re also an employee of the company, don’t worry — you won’t be taxed twice. The dividend rules take priority.
And What About National Insurance?
This is where things can get a bit tricky.
In many cases, HMRC will assume the loan came from your role as an employee, which means the write-off is treated as earnings — and therefore subject to Class 1 National Insurance (both employer and employee contributions).
But there’s another way of looking at it…
If you can prove the loan relates to your role as a shareholder rather than as an employee — for example, if it’s approved by the other shareholders at a general meeting or by written resolution — then no National Insurance should be due.
That said, HMRC may challenge this, so proceed with caution.
A Better Way? Pay a Dividend Instead
If the company has enough retained profits, it might make more sense to declare a dividend and use that to clear the loan.
Why?
- You’ll still pay income tax at the dividend rate
- But you’ll avoid National Insurance altogether
It’s a cleaner, more tax-efficient solution in many cases — especially if you’re trying to stay on HMRC’s good side.
Need Help Navigating Director’s Loans?
Director’s loans can be a useful tool, but they come with a few tax traps that are easy to fall into if you’re not careful.
If you’re thinking about writing off a director’s loan — or you’ve already done so and aren’t sure what to do next — get in touch. We’ll help you find the most tax-efficient path forward.
Contact Jon or the team today and let’s get things sorted the right way.
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Any questions?
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