Do you know how to manage the increased director’s loan tax charge?
We are officially a few days into the 2026/27 tax year and directors need to be positive on how the latest reforms affect them.
One change that we have seen potentially slip under the radar is the two per cent increase in the tax charge on directors’ loans, which came into effect on 6 April 2026.
This tax charge might not be grabbing headlines, but directors need to be aware of the consequences that failing to manage it can have on their cash flow and tax efficiency.
What is a director’s loan account?
A director’s loan account is a record of all financial transactions between you and your company.
This will track all the money you have put into the business and anything you have taken out that isn’t salary, dividends or reimbursed expenses.
When your withdrawals exceed what you have contributed or earned, your account will become overdrawn.
What is the Section 455 (S455) charge?
When your director’s loan account remains overdrawn for nine months and one day after the end of your accounting period, HMRC will apply a tax charge under Section 455 of the Corporation Tax Act 2010.
This S455 charge will be calculated as a percentage of the outstanding balance.
Directors can breathe a sigh of relief as this charge is temporary and can be reclaimed once the loan is repaid.
What has changed since 6 April 2026?
Since 6 April 2026, the S455 tax rate has increased by two per cent from 33.75 per cent to 35.75 per cent and the charge will apply to loans made on or after this date.
A two per cent increase may appear small, but it will have an impact if not managed effectively.
For example, an overdrawn loan of £50,000 would now trigger a tax charge of £17,875, which is compared to £16,875 previously.
The charge will remain repayable, but it is still a significant amount of money sitting with HMRC that could have been used to support your business.
How can you manage the increased charge?
There are many ways to stay compliant and minimise the impact of this charge and you can start by reviewing your loan account regularly.
Don’t wait until your year-end. You should be planning ahead of the nine-month deadlines, as this will give you more flexibility to act early and create a repayment plan.
This plan could involve clearing the balance through dividends (if profits allow), adjusting your salary or making direct repayments.
If you are looking for a more tax-efficient way to extract funds, you could charge interest on your director’s loans and this will reduce the company profits that are subject to Corporation Tax.
However, these interest payments must be reported to HMRC, typically through CT61 or digital submissions.
How can we help you manage your director’s loans?
We know you have had quite a few reforms come at you this tax year and trying to manage the S455 increase can feel like another plate to spin.
However, you do not need to worry as we are here to advise you on what the new increase means for you and the most tax-efficient way to extract funds.
We can also ensure you remain compliant with HMRC deadlines and reporting and help you plan your repayments, ensuring they do not damage your cash flow.
Our professional team are on hand to help you continue to use director’s loans efficiently and without any unnecessary tax surprises.
For further advice or support on the director’s loan tax charge, contact our team.
