Directors’ loan accounts (DLAs) can be very useful – especially for owner-managed businesses – but they come with some tax implications under Section 455 (Corporation Tax Act 2010).

If you fail to handle them carefully, overdrawn DLAs can lead to unexpected tax liabilities for both the company and the director.

As such, this is an area you need to understand if you’re going to use directors’ loans.

What is Section 455?

Section 455 applies when a participator in a close company, or their associate, owes money to the company that is not repaid within nine months and one day of the end of the company’s accounting period.

While often associated with directors’ loans, the legislation also covers loans to partnerships, trusts, or other entities connected to participators.

The tax rate for Section 455 is 33.75 per cent.

This charge applies to the outstanding loan balance and must be paid by the company – not the individual.

How to avoid Section 455 issues

To avoid a Section 455 tax charge, the loan must be repaid before the nine-month deadline following the end of the accounting period.

However, HM Revenue & Customs (HMRC) imposes strict anti-avoidance measures, including:

• The 30-day rule: Repayments of £5,000 or more made within 30 days of taking out a new loan are disregarded.
• The arrangements rule: If arrangements are in place for a new loan of £5,000 or more when the existing balance exceeds £15,000, repayments are ignored.

These rules are designed to prevent practices such as “bed and breakfasting”, where loans are repaid temporarily to avoid tax before being reissued.

Having said this, exceptions do apply and not all loans are subject to a Section 455 charge.

These exceptions include:

• Loans made in the ordinary course of business, such as for trade purposes.
• Loans under £15,000 to employees who do not have a material interest in the company.
• Goods or services supplied on normal credit terms, provided the credit period does not exceed six months.

If you are confused as to whether or not Section 455 applies to your specific circumstances, please speak to a tax adviser at the earliest opportunity!

Is there relief for Section 455 Tax?

Yes.

If a loan is repaid after the nine-month deadline, the company can reclaim the Section 455 tax.

Relief is available nine months and one day after the end of the accounting period in which the loan was repaid.

Claims are made via Form L2P, and companies must ensure the repayment is properly documented in their accounts.

Are there Benefit in Kind and personal tax implications?

In short, yes.

For directors, loans exceeding £10,000 trigger a beneficial loan interest charge unless interest is paid to the company at HMRC’s official rate.

This benefit must be reported on Form P11D, and the company is liable for Class 1A National Insurance on the taxable amount.

Should you be aware of any compliance deadlines?

Yes, absolutely!

• P11D submission: By 6 July after the end of the tax year.
• Class 1A NIC payment: By 19 July (or 22 July if paying electronically).

You should also have clear processes in place for managing payments and directors’ loan periods within your accounting practices to avoid inadvertently missing key deadlines.

If you’d like more information on directors’ loans or Section 455, please speak with our experts.