The s455 tax rate(Section 455) is 35.75% on overdrawn director loan balances advanced on or after 6 April 2026 under Section 455 Corporation Tax Act 2010. It is a temporary corporate tax penalty levied on close companies when a participator loan remains unpaid nine months and one day post-accounting year-end.

• The Section 455 tax charge applies at 35.75% for loan advances made on or after 6 April 2026, rising from the previous 33.75% statutory rate.
• Close companies must settle overdrawn balances within nine months and one day of their accounting period end to prevent corporate tax liability.
• Repaid Section 455 tax is recoverable from HMRC nine months and one day after the close of the accounting period in which the loan was settled.

What Is the Current Section 455 Tax Rate on Director Loans?

The statutory Section 455 tax rate is 35.75% for all director loan balances and advances made on or after 6 April 2026. HM Revenue & Customs (HMRC) ties this corporation tax penalty directly to the higher-rate dividend tax band under the Corporation Tax Act 2010.

When personal dividend taxes increase, Section 455 rises automatically to prevent company directors from extracting untaxed profits through perpetual company loans.

The loan rate depends strictly on the date the advance occurred, rather than the company year-end date. Advances taken between 6 April 2022 and 5 April 2026 remain taxable at the legacy 33.75% rate.

The following table outlines the historical evolution of the Section 455 tax charge alongside statutory payment deadlines:

Advance Date Period	Statutory s455 Tax Rate	Payment Due Date	Reclaim Mechanism
On or after 6 April 2026	35.75%	9 months + 1 day after accounting year-end	Form CT600A / Form L2P
6 April 2022 – 5 April 2026	33.75%	9 months + 1 day after accounting year-end	Form CT600A / Form L2P
6 April 2016 – 5 April 2022	32.50%	9 months + 1 day after accounting year-end	Form CT600A / Form L2P
Prior to 6 April 2016	25.00%	9 months + 1 day after accounting year-end	Form CT600A / Form L2P

Figures confirmed as of August 2026 via HMRC Corporation Tax Guidelines.

What an SME Business Owner Should Know About Section 455 Tax

As an SME business owner, you must understand that Section 455 tax is not a permanent corporate charge, but rather an interest-free liquidity deposit held by HMRC until you clear your borrowing.

You trigger this legislation whenever your Director’s Loan Account (DLA) is overdrawn, meaning you have withdrawn more funds from the business than you have contributed or taken via taxed remuneration.

You should track the following statutory criteria to maintain corporate compliance:

• Close Company Classification: Your limited company falls under Section 455 rules if it is controlled by five or fewer participators (shareholders) or by directors who hold equity.
• Statutory Grace Period: You have exactly nine months and one day from your company accounting reference date to repay or offset the overdrawn balance in full (for a broader overview of business filing deadlines, see our guide on when are taxes due).
• Mandatory CT600A Disclosure: You must disclose all director loan transactions on Form CT600A supplementary pages alongside your main Corporation Tax return CT600, even if you clear the loan before tax becomes payable.
• Associate Loan Liability: Your company incurs the charge if loans are extended to your family members, spouses, or connected business partners.

You should review running balances quarterly with your accountant to prevent unmanaged borrowing from triggering avoidable year-end liabilities.

How the Section 455 Tax Rate Affects SME Businesses

The Section 455 tax rate severely restricts SME operational liquidity by locking up 35.75% of overdrawn loan capital with HMRC for an extended operational cycle.

For an owner-managed business with an overdrawn balance of £50,000, the company must pay £17,875 in Section 455 tax alongside its standard corporate trading liabilities.

Working Capital Depletion

SMEs operating on lean cash reserves often struggle to absorb the double impact of trading Corporation Tax and Section 455 levies. Diverting commercial cash to HMRC removes funding required for payroll, supplier payments, inventory, and growth investments.

The Reclaim Lead-Time Trap

Reclaiming this tax is not immediate. Because HMRC does not release funds until nine months and one day following the end of the accounting period in which the repayment occurred, an SME can have capital trapped for 18 to 24 months.

Solvency and Balance Sheet Impairment

An unmanaged overdrawn director loan remains an asset on the company balance sheet filed at Companies House. However, if the director cannot repay the balance, external credit rating agencies discount this asset, harming company borrowing terms and credit limits.

When Does Section 455 Tax Apply to an Overdrawn Director’s Loan?

Section 455 tax applies whenever a close company makes a loan or advance to an individual participator that remains unsettled after the statutory payment window. The charge attaches to the corporate entity, not the individual borrower, making the company legally liable for payment.

The charge is activated by specific operational accounting scenarios:

• Drawings taken by a shareholder-director in anticipation of future profits where insufficient dividends are formally declared.
• Personal living expenses, domestic bills, or vehicle costs paid directly using corporate bank accounts.
• Direct loans advanced to family members or associates of a controlling shareholder.
• Outstanding credit balances transferred to a director following the purchase of company assets at undervalue.

Managing these triggers requires establishing formal settlement routes before the statutory nine-month deadline expires.

How to Clear an Overdrawn Director’s Loan Before the Statutory Deadline

You can eliminate an overdrawn director’s loan balance before the Section 455 tax charge takes effect by using four standard settlement methods.

1. Declare a Formal Dividend: You can vote a dividend to credit your loan account, provided your company holds sufficient distributable post-tax profits under the Companies Act 2006. When doing so, ensure you review the latest UK dividend tax rates (10.75% basic, 35.75% higher, and 39.35% additional rate) to factor in your personal self-assessment liability.
2. Vote a Director Salary or Bonus: You can process an executive bonus through your payroll system to credit the DLA. While this qualifies as an allowable Corporation Tax deduction, it will be taxed via PAYE against your standard allowances (such as the standard 1257L tax code) and incur Class 1 NICs.
3. Make a Direct Cash Repayment: You can transfer personal, non-corporate funds directly into the company bank account to clear the debt. This is the cleanest route because it triggers zero personal tax liabilities.
4. Formally Write Off or Release the Debt: The company can formally waive the loan through a deed of release. HMRC treats the written-off balance as deemed dividend distribution for income tax purposes, requiring personal tax settlement without allowing a Corporation Tax deduction for the company.

You must balance personal tax liabilities against corporate cash preservation when selecting your repayment mechanism.

Anti-Avoidance Rules: The 30-Day Bed and Breakfasting Trap

Under the 30-day “bed and breakfasting” provisions of Section 464C (Corporation Tax Act 2010), tax relief is denied if a director repays £5,000 or more to an overdrawn loan account and withdraws £5,000 or more within a 30-day window. HMRC treats the original loan as un-cleared, preserving the 35.75% tax liability.

Under Section 464C, HMRC also enforces the “arrangements rule”. If an outstanding loan balance exceeds £15,000 and arrangements are made to redraw funds at any point in the future, relief is denied even outside the 30-day window.

Where running accounts contain borrowings spanning across 6 April 2026, repayments are matched under statutory ordering rules. By default under common law, repayments clear the oldest debts first.

This means repayments clear 33.75% debt before 35.75% debt unless you pass explicit board resolutions attributing repayments to post-April 2026 drawings.

How to Reclaim Section 455 Tax from HMRC

You can reclaim paid Section 455 tax directly from HMRC once your overdrawn loan balance has been repaid, released, or written off.

1. Confirm Loan Clearance Date: Record the exact date and accounting period in which you cleared the overdrawn balance using cash, dividends, or salary credits.
2. Observe the Statutory Repayment Window: Wait until nine months and one day after the end of the accounting period in which the repayment was made before submitting your reclaim. HMRC will reject premature applications.
3. Submit the Appropriate HMRC Schedule: Use the supplementary Form CT600A if you are amending your Corporation Tax return within twelve months of the filing deadline. Submit standalone Form L2P if the return period is closed or if you are claiming late relief independently.
4. Comply with the Statutory Four-Year Limitation: Complete all reclaim documentation within four years from the end of the financial accounting period in which the loan clearance occurred under Section 458 CTA 2010.

You should factor these strict statutory waiting times into your financial cash-flow forecasts to prevent liquidity gaps.

Beneficial Loan Rules: Section 455 Tax vs P11D Benefit-in-Kind

Section 455 tax is a corporate penalty on unpaid company debt, whereas Benefit-in-Kind rules under Section 175 of the Income Tax (Earnings and Pensions) Act 2003 impose personal income tax on cheap or interest-free credit.

If your total overdrawn director loan balance exceeds £10,000 at any point during the tax year, it is classed as a beneficial loan.

Unless you pay interest to the company at or above HMRC’s Official Rate of Interest (3.75%), the unpaid interest is treated as taxable personal income.

The company must report the calculated interest benefit on your annual Form P11D by 6 July following the end of the tax year.

Additionally, the business must pay Class 1A National Insurance on the value of the benefit. Maintaining a loan under the £10,000 threshold avoids P11D obligations, but does not exempt the company from Section 455 tax if the balance remains outstanding past the statutory nine-month corporation tax deadline.

Strategic Summary for Company Directors

Managing your overdrawn balances early prevents costly cash-flow lockup under the current 35.75% rate. Reconcile your director loan accounts quarterly, assess personal dividend liabilities, and submit Form CT600A on time to protect working capital.

For UK SME directors in 2026/27, active DLA reconciliation remains the most effective safeguard against locking up vital working capital in avoidable corporate penalties.

FAQ

What is the Section 455 tax rate for the 2026/27 tax year?

The Section 455 tax rate is 35.75% for all director loans and advances made on or after 6 April 2026. Loans taken before this date remain subject to the previous 33.75% rate.

Does Section 455 tax apply if the director loan is under £10,000?

Yes. Section 455 tax applies to any overdrawn loan balance regardless of value if it remains unpaid nine months and one day after year-end. The £10,000 threshold applies solely to P11D benefit-in-kind rules.

How long does HMRC take to refund Section 455 tax?

HMRC issues refunds only after nine months and one day following the end of the accounting period in which the loan was repaid. Processing typically takes four to eight weeks once this date passes.

What is the 30-day bed and breakfasting rule under Section 464C?

The rule is a statutory anti-avoidance provision that denies Section 455 tax relief if a director repays £5,000 or more to a loan account and draws out £5,000 or more within 30 days.

What happens if a company writes off an overdrawn director’s loan?

Writing off or releasing a director’s loan clears the company’s Section 455 liability; however, HMRC treats the forgiven debt as deemed dividend income for the recipient, triggering personal dividend tax.

Disclaimer: This article is for general information only and is not a substitute for professional tax or legal advice.