An unannounced tax rise
If you’re a director-shareholder of a close company, overdrawn director’s loan accounts can trigger unexpected tax charges.
With changes coming from 6 April 2026, the cost of getting this wrong is increasing—making planning more important than ever.
What is the tax charge on director’s loans?
If a close company makes a loan to a participator (typically a shareholder/director), and that loan remains outstanding at the end of the accounting period, the company may face a corporation tax charge.
This charge is:
- Payable by the company (not the individual)
- Designed to discourage extracting funds as loans instead of dividends
The key change: Higher tax from April 2026
The tax rate on these loans is linked to the higher rate dividend tax.
Following the Autumn Budget 2025:
- From 6 April 2026, the rate increases to 35.75%
- Up from 33.75% previously
This means:
Leaving director’s loans outstanding will become more expensive.
When is the tax due?
The tax is payable:
- 9 months and 1 day after the end of the accounting period
However, there is a key planning opportunity.
How to avoid the tax charge
No tax is payable if the loan is:
- Repaid, or
- Written off
before the payment deadline.
In practice, loans are often cleared by:
- Declaring a dividend
- Paying a bonus (with tax implications)
Why timing now matters more than ever
With different tax rates applying before and after 6 April 2026, how repayments are allocated becomes critical.
Example: Why allocation of repayments matters
Let’s say a director has:
- £22,000 borrowed before 6 April 2026 → taxed at 33.75%
- £18,000 borrowed after → taxed at 35.75%
If a repayment is made, you should allocate it carefully.
Best approach:
- Repay the higher-tax loans first
If done correctly, this reduces the overall tax charge.
The risk: HMRC default rules
If no allocation is specified:
- HMRC will usually allocate repayments to the oldest loans first
This is not always beneficial—especially where:
- Newer loans attract a higher tax rate
Without planning, you could end up paying more tax than necessary.
Can the tax be reclaimed?
Yes.
If the company pays the tax but the loan is later:
- Repaid, or
- Written off
The tax can be reclaimed.
However:
- Repayments must be genuine
- Anti-avoidance rules apply (e.g. “bed and breakfasting” of loans)
What happens if the loan is written off?
If a loan is written off:
- The company may reclaim the tax
- But the director is taxed personally
This can trigger:
- Income tax
- Potential National Insurance
So this option needs careful consideration.
Common pitfalls to avoid
Director’s loan accounts are a frequent area of HMRC enquiry.
Watch out for:
- Leaving loans outstanding at year-end
- Not planning repayments before deadlines
- Incorrect allocation of repayments
- Re-borrowing shortly after repayment (anti-avoidance rules)
- Ignoring personal tax implications
Practical steps to take now
Before April 2026, you should:
- Review your director’s loan balance
- Identify loans that will attract the higher rate
- Plan repayments strategically
- Document how repayments are allocated
- Consider dividends or other extraction methods
Final thoughts
Director’s loan accounts can be useful—but without careful management, they can become tax traps.
With the tax rate increasing to 35.75% from April 2026, the cost of inaction is rising.
Early planning can help you avoid unnecessary tax and stay compliant.
Need help reviewing your director’s loan position?
At Merranti Accounting, we help directors:
- Manage loan accounts efficiently
- Plan tax-effective profit extraction
- Avoid HMRC penalties and unexpected charges
If you have an overdrawn loan account or want to review your position before April 2026, get in touch with our team today.
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