Director's Loan Tax Rising to 35.75% From April 2026 — How to Avoid the Section 455 Charge

If you run a limited company and occasionally dip into company funds via a director's loan, a rate rise coming into effect from April 2026 makes getting the timing right more important than ever.

What's changing

Where a director's loan account is overdrawn — meaning the director owes the company money — and isn't repaid within nine months and one day of the company's year-end, the company must pay a Section 455 tax charge. From April 2026, that charge is rising by 2 percentage points, from 33.75% to 35.75%.

Loans and benefits provided before 6 April 2026 remain subject to the current 33.75% rate; only loans made on or after that date attract the new 35.75% charge. The good news is that Section 455 tax is refundable via form L2P once the loan is fully repaid — but the refund only arrives nine months and one day after the end of the accounting period in which repayment happened, so it's a cash-flow cost even when temporary.

Other rules that still catch directors out

• Benefit in kind on larger loans. A benefit in kind arises on director's loans over £10,000 unless the company charges an appropriate rate of interest, creating a personal tax liability alongside the company's Section 455 exposure.
• Anti-avoidance on repay-and-reborrow. If you repay more than £5,000 to clear your loan account, then take out a further loan over £5,000 within 30 days, the "bed and breakfasting" rules mean the company still faces a Corporation Tax charge as if the original loan hadn't been repaid.

Checklist: managing your director's loan account

• Know your company's year-end and the nine-month-and-one-day deadline for repaying any overdrawn balance to avoid the charge entirely.
• If you can't repay in cash, consider a dividend (if profits and Corporation Tax position allow) to clear the balance — but take advice on the personal tax impact first.
• Charge yourself interest at HMRC's official rate on loans over £10,000 to avoid a separate benefit-in-kind charge.
• Never repay and immediately re-borrow within 30 days to sidestep Section 455 — HMRC's anti-avoidance rules are specifically designed to catch this.
• File form L2P promptly once a loan is repaid to reclaim any Section 455 tax already paid.
• Keep a running ledger of the account balance throughout the year rather than reviewing it only at year-end — surprises are easier to avoid with regular checks.
• Speak to your accountant before your year-end if the balance is significant, since restructuring the timing of repayment or dividends can materially change the tax outcome.

International comparison

The UK's approach — taxing the company on an unpaid director loan rather than the individual directly — differs from the US, where shareholder loans from a closely-held corporation can be recharacterised as taxable dividends by the IRS if not properly documented with formal loan terms. Australia's Division 7A rules operate similarly, treating undocumented private company loans to shareholders as deemed dividends.

Key Numbers

• 35.75% new Section 455 rate for loans made on or after 6 April 2026
• 33.75% rate still applies to loans made before that date
• £10,000 threshold above which a benefit in kind can arise without interest charged

Sources

• Directors Loan Tax Changes 2026 — DSG
• What Are the Tax Implications of a Director's Loan Account? — The Accountancy Partnership

Educational content only — not financial advice.