Directors Loans

Directors Loans

Before the introduction of the Corporation Tax Act 2010 Section 455 it was possible to take out an indefinite loan from your company and avoid income tax.

Director loans: Understanding CTA 2010 Section 455

Prior to the Corporation Tax Act 2010 Section 455 (CTA 2010 Section 455), the idea of building up liquid assets in your own company and taking indefinite loans had obvious attractions. As you were not extracting the funds from the company, instead taking them as a loan and remaining a debtor to the company, there was no income tax to pay. Unfortunately, it didn’t take too long for HMRC to close this loophole.

Before we look at CTA 2010 Section 455 in more detail, it is essential to recognise that a company (even if you are a 100% shareholder) is legally seen as a separate entity. This means that in the eyes of the law, the funds in question belong to the company.

How does CTA 2010 Section 455 work?

This particular legislation relates to loans/advances made to a participant from a close company, which are defined as:-


While typically a participant would be a company owner, this can also relate to shareholders and, in extreme circumstances, loan creditors. These are individuals with a degree of influence over the company.

Close company

In reality, the vast majority of private companies in the UK are defined as “close” companies, although the official definition is any of the following:-

  • Five or fewer participants 
  • Unlimited directors who are also shareholders

So now we know who and what type of companies CTA 2010 Section 455 relates to, how does it work in practice?

Scenarios where CTA 2010 Section 455 is applicable

In the past, company owners attempted to use loopholes in the tax legislation to forward loans/advances to connected parties. As a consequence, HMRC has extended the legislative reach to include:-

  • Participants (as defined above)
  • Relatives, spouses or civil partners of a participant
  • Partnerships where the recipient is a partner

There are still situations where a company can make a loan to an individual not covered under any of the above conditions. This prompted HMRC to introduce a further level of regulation known as CTA 2010 Section 459, which relates to indirect loans. 

CTA 2010 Section 459

A typical scenario would be where a third party, not covered above, was to receive a loan from the company and make a “gift” back to a company participant. The terms of CTA 2010 Section 455 are precise, while CTA 2010 Section 459 is more general and closes down other potential routes back to a participant.

Directors loan accounts

Theoretically, each company director has a loan account, which could be in debit, credit, or zero balance. While we are focusing on loan accounts with a debit, many will have a credit where a director has put their own money into the company. Whatever the situation, the company must record any changes in a director’s loan account, creating a detailed paper trail.

Overdrawn loan account

If a loan account is overdrawn at the company year-end, this will attract a tax charge of 33.75% from 6 April 2022 or 32.5% before that date. This tax is based on the outstanding loan amount, although it is only payable nine months and one day after the company’s year-end. If the loan account is repaid in the nine-month period after the year-end, the CTA 2010 Section 455 tax charge is cancelled.

Where a loan hasn’t been repaid in time, and the S455 charge has been paid, it’s important to note that the S455 tax charge is only “temporary”. It can be reclaimed once the director’s loan has been repaid. Repayment of the tax charge is neither automatic nor prompt, with the company needing to apply using a form L2P. Payment will be received from HMRC within nine months and one day after the end of the accounting period in which the claim is made.

Benefits in kind

In certain circumstances, there is a double whammy for overdrawn director’s loan accounts. Not only is there an S455 tax liability on the company, but there may also be additional benefits in kind liabilities.

For a director’s loan to be classed as a benefit in kind, the following conditions need to be met:-

  • The outstanding debt is at least £10,000
  • The company is charging no interest OR
  • The interest rate is less than the HMRC minimum rate

All benefits in kind are submitted to HMRC on a P11D form, although this is the responsibility of the company, not the individual. Usually, the benefit in kind would be added to a director’s PAYE income and taxed accordingly, including an element of national insurance paid by the company. However, there may be occasions where the director will need to report benefits in kind as part of their self-assessment return.

Bed-and-breakfast rules

In the past, to avoid a CTA 2010 Section 455 tax charge, there was a temptation to repay your loan before the company year-end, taking out a new loan at the start of the next financial year. This is known as a “Bed-and-Breakfast” transaction which was effectively tax avoidance (perfectly legal). 

It wasn’t long before HMRC changed the rules – now, there must be at least 30 days between the repayment of a director’s loan and the receipt of any new loan. If the two transactions are within 30 days, HMRC can offset these and charge S455 tax on the original loan amount. 

Potential exemptions from the S455 tax charge

There are several scenarios where HMRC will not pursue a S455 tax charge, such as:-

  • Where offsetting the balance of husband and wife directors’ accounts removes the deficit
  • Funding is provided in the ordinary course of business
  • Finance is received in the supply of goods and services
  • A director has no material interest in the company (no more than 5% of ordinary shares)

Occasionally, we have seen situations where directors have agreed to write off funds owed on a director’s loan account. While the directors are perfectly within their rights, HMRC would likely dispute the write-off, treating the funds as dividends or employment income, taxing the company and the director accordingly.


While there are still legitimate company-related tax benefits, some of the more tax-efficient means of extracting funds have been addressed by HMRC. You must take advice about company and personal taxation to avoid any unwelcome consequences further down the line. Even though the S455 tax charge can be reclaimed once a director’s loan has been repaid, the current rate of 33.75% could significantly impact your company’s cash flow in the meantime.



Chris Wilkins FCCA is a Chartered Certified Accountant, Registered Auditor and the managing partner of Wilkins Southworth based in Barnes, South West London

Share this post