Loans to Participators: An Increase in the Section 455 Charge

Loans made by close companies to their directors or shareholders are a long-standing focus area for HM Revenue & Customs (HMRC). While directors’ loan accounts are often used for short-term funding or to manage cashflow, they can give rise to significant tax charges if not handled carefully.

One of the most important charges to be aware of is the section 455 charge, which applies where loans to participators remain outstanding at the end of a corporation tax accounting period. Following changes announced in the November 2025 Budget, the cost of getting this wrong is increasing for loans made on or after 6 April 2026.

This article explains how the section 455 charge works, why the rate is increasing, and the practical steps companies and director-shareholders should consider.

What is the section 455 charge?

Section 455 of the Corporation Tax Act 2010 applies to loans or advances made by a close company to a “participator” that are outstanding at the end of the company’s corporation tax accounting period (CTAP).

In broad terms:

• A close company is usually a UK-resident company controlled by five or fewer participators, or by its directors.
• A participator is generally a shareholder, director, or someone with an interest in the company’s capital or income.

Where a loan to a participator is still outstanding at the CTAP end, the company is required to pay a temporary corporation tax charge under section 455.

Although often described as “temporary”, the charge can result in a substantial cashflow cost and, in some cases, may remain unrecovered for many years.

How the section 455 rate is determined

Historically, the section 455 rate was set at a fixed percentage, which Chancellors adjusted from time to time. However, this approach changed following the Finance Act 2016.

Since then, the section 455 rate has been linked directly to the dividend upper rate specified in section 8(2) of the Income Tax Act 2007. In practical terms, this means:

• The section 455 rate automatically mirrors the higher rate of dividend tax.
• Any future changes to dividend tax rates will feed directly into the section 455 charge, without further legislation.

This linkage was intended to ensure consistency between the tax treatment of loans and dividends, but it also means that section 455 is now more sensitive to wider income tax policy changes.

Change in dividend tax rates

In the November 2025 Budget, the Chancellor announced that dividend tax rates for basic-rate and higher-rate taxpayers would both increase by two percentage points from 6 April 2026.

From that date:

• The basic rate of dividend tax increases to 10.75%
• The higher (upper) rate of dividend tax increases to 35.75%

Because the section 455 rate is tied to the dividend upper rate, this change has a direct and automatic impact on loans to participators.

Increased section 455 charge from 6 April 2026

As a result of the dividend rate increase:

• Loans advanced before 6 April 2026 are subject to section 455 at 33.75%
• Loans advanced on or after 6 April 2026 are subject to section 455 at 35.75%

This distinction is crucial where director-shareholders have running or fluctuating loan balances that span the change in rate.

For companies with overdrawn directors’ loan accounts, the increased rate represents:

• a higher upfront corporation tax cost, and
• a greater need for careful planning around repayments and allocations.

When is section 455 tax payable?

The section 455 charge is payable nine months and one day after the end of the CTAP in which the loan is outstanding.

For example:

• A company with a 31 March year end must pay any section 455 tax by 1 January following the year end.
• A company with a 30 June year end must pay by 1 April following the year end.

This payment deadline is important because relief from the charge is available if the loan is cleared before that date.

Clearing overdrawn loan accounts

Relief from the section 455 charge is available under CTA 2010, s 458 where the loan is:

• repaid, or
• written off by the company,

before the section 455 payment date.

In practice, loans are often cleared by:

• paying cash back to the company, or
• declaring dividends (assuming sufficient distributable reserves exist).

Where a loan is cleared in time, no section 455 tax is payable. Where it is only partially cleared, the charge applies to the remaining balance.

Importance of allocating repayments correctly

With different section 455 rates applying depending on when loans were advanced, the allocation of repayments has become increasingly important.

Where a director has multiple loans or a running loan account that spans different periods, the parties are generally free to decide which loans a repayment relates to, provided this intention is clearly documented.

Failure to specify the allocation can lead to HMRC applying default rules that may not produce the most favourable outcome.

Example: partial repayment of a director’s loan

Debbie owns 100% of her company, which has a 30 June year end.

At 30 June 2026, her overdrawn director’s loan account totals £40,000, made up of:

• £25,000 advanced between 1 July 2025 and 5 April 2026 (section 455 rate: 33.75%)
• £15,000 advanced between 6 April 2026 and 30 June 2026 (section 455 rate: 35.75%)

In March 2027, Debbie repays £27,000 to the company.

If the repayment is formally allocated:

• first to the post-5 April 2026 loans, and
• then to £12,000 of the earlier loans,

this leaves £13,000 of the pre-6 April 2026 loans outstanding.

The resulting section 455 charge is:

• £13,000 × 33.75% = £4,388, payable on 1 April 2027.

What happens if no allocation is made?

If neither the director nor the company specifies how repayments are to be allocated, HMRC will generally apply the rule in Clayton’s case, which treats repayments as being applied to the oldest outstanding loans first.

In Debbie’s case, this would mean:

• the pre-6 April 2026 loans are treated as cleared first, and

• £13,000 of post-5 April 2026 loans remain outstanding.

The section 455 charge would then be:

• £13,000 × 35.75% = £4,648

This produces a higher tax cost, despite the same overall repayment being made.

The example highlights why clear documentation of repayment intentions is now essential.

Reclaiming section 455 tax previously paid

Where section 455 tax has already been paid, it may be reclaimed once the loan is repaid or written off.

Claims are made using form L2P, which can be submitted online. However, repayment is not made until at least nine months and one day after the end of the CTAP in which the loan was cleared.

As a result, even where a loan is eventually repaid, the company may suffer a prolonged cashflow disadvantage.

Practical points and common traps

Loans to participators can give rise to several additional tax issues beyond section 455, including:

• benefit-in-kind charges where interest is not charged at HMRC’s official rate,
• income tax charges where loans are written off,
• interaction with dividend rules and distributable reserves.

These issues frequently catch out owner-managed businesses where loan accounts are not reviewed regularly.

How we can help

If your company has an overdrawn director’s loan account, or you are planning to repay or clear loans around the 6 April 2026 rate change, we can help you review your position. We can advise on repayment strategies, ensure allocations are documented correctly, and assess the wider tax implications for both the company and the director. Please contact us if you would like us to review your circumstances.