If you’re running a limited company, you’ve likely used a Director’s Loan Account (DLA) at some point. It’s one of the perks of being the boss: having a bit of flexibility with the company’s cash. But as of April 6, 2026, the cost of leaving that loan unpaid just got a little bit steeper.
HMRC has officially bumped the Section 455 (S455) tax rate up to 35.75%.
At Makes Sense Accountants, we’re all about keeping things simple. We know you’ve got a business to run, so we’ve broken down everything you need to know about this hike, why it happened, and how to stop it from eating your cash flow.
The Quick Version (For Those in a Rush)
If you only have thirty seconds, here is the "too long; didn't read" summary:
- What is it? S455 is a tax your company pays if you owe it money (a Director's Loan) and don't pay it back quickly.
- The Change: The rate jumped from 33.75% to 35.75% on April 6, 2026.
- The Deadline: You have 9 months and 1 day after your company's year-end to pay the loan back or clear it.
- The Good News: This tax is technically a deposit. HMRC gives it back once the loan is repaid: but they keep your money in the meantime.
- The Bad News: It’s a massive hit to your company’s bank balance while HMRC is holding onto it.
What Exactly is a Director’s Loan?
In the eyes of the law, your limited company is a separate legal person from you. Even if you own 100% of the shares, the money in the company bank account belongs to the company, not you.
When you take money out that isn't a salary, a dividend, or a reimbursement for expenses, it’s recorded in your Director’s Loan Account. If you take out more than you put in, your account is "overdrawn." HMRC doesn't mind you doing this, but they don't want you using the company as a tax-free personal piggy bank forever. That’s where the S455 charge comes in.
Why Did the Rate Change to 35.75%?
You might be wondering where that very specific number: 35.75%: comes from. It’s not just a random figure HMRC pulled out of a hat.
The S455 tax rate is specifically designed to mirror the higher rate of dividend tax. Because dividend tax rates increased recently, the S455 rate had to follow suit. If it didn't, business owners would just take "loans" from their companies instead of paying themselves dividends to avoid the tax. By keeping the rates the same, HMRC ensures there’s no "cheap" way to get money out of the business without paying the Treasury its share.
For many, our limited company accounting services focus heavily on managing these balances to ensure you aren't paying more than you absolutely have to.
The "9 Months and 1 Day" Rule
This is the most important date in your calendar if you have an overdrawn loan account.
You don't have to pay the 35.75% tax the second you take the money. You actually have a "grace period." You must repay the loan within nine months and one day of the end of your Corporation Tax accounting period.
Let’s look at an example:
- Your company year ends on December 31, 2025.
- You have an overdrawn loan of £20,000.
- You have until October 1, 2026 to pay that £20,000 back to the company.
If you pay it back by October 1st, you pay £0 in S455 tax. If you still owe that £20,000 on October 2nd, your company will owe HMRC £7,150 (35.75% of £20,000).
The Cash Flow Sting
The biggest misconception about the Director's Loan charge is that it's a "permanent" tax. It’s actually more like a forced interest-free loan to the government.
When you eventually pay the loan back to your company, the company can claim that 35.75% back from HMRC. Sounds fine, right? Not quite.
The problem is the delay. HMRC won't pay the refund until nine months and one day after the end of the accounting period in which you repaid the loan. This can mean the government holds onto thousands of pounds of your business's cash for years. In a climate where interest rates are high and cash flow is king, losing 35.75% of your loan value to HMRC’s bank account is a move most businesses want to avoid.
A Comparison: Old vs. New
To show you why this 2% increase matters, let’s look at the numbers.
| Loan Amount | Old Rate (33.75%) | New Rate (35.75%) | The Difference |
|---|---|---|---|
| £10,000 | £3,375 | £3,575 | + £200 |
| £50,000 | £16,875 | £17,875 | + £1,000 |
| £100,000 | £33,750 | £35,750 | + £2,000 |
While a few hundred pounds might not break the bank, as the loan grows, the "deposit" you have to hand over to HMRC becomes a serious business liability. This is why our business advisory services uk often focus on extracting profits in the most tax-efficient way possible, rather than relying on long-term loans.
How to Clear the Loan (Without Hurting Your Wallet)
If you find yourself with an overdrawn DLA and the deadline is looming, you have a few options:
- Physical Repayment: You simply pay the cash back into the company bank account from your personal funds.
- Declare a Dividend: The company "pays" you a dividend, but instead of the cash hitting your personal bank account, it is used to offset the loan. Note: You will still have to pay personal Dividend Tax on this.
- Run a Bonus: Similar to a dividend, the company pays you a salary bonus to clear the debt. This will attract PAYE and National Insurance, so it's often the most expensive route, but it's an option.
Beware of "Bed and Breakfasting"
HMRC is wise to the "old tricks." Some directors used to pay the loan back the day before the deadline and then take it right back out the day after. HMRC calls this "Bed and Breakfasting," and they have strict rules to stop it.
If you repay a loan of over £5,000 and take out a new loan within 30 days, HMRC will treat it as if you never repaid the first loan. They want to see that the money has actually been returned to the business for a meaningful amount of time. If you’re unsure if your repayment counts, it’s worth checking out our accountancy and tax services to stay on the right side of the law.
What About Personal Tax?
Don't forget that the 35.75% is a company tax. As an individual, if your loan is over £10,000 at any point in the year and you aren't paying the company interest (at the official rate), HMRC views this as a "Benefit in Kind."
This means you’ll have to report it on a P11D form, and you’ll personally owe income tax on the "interest" you saved by having a 0% loan. The company will also have to pay Class 1A National Insurance. It’s a double-whammy that makes large, interest-free director loans less attractive than they used to be.
How We Can Help
Navigating the world of S455, P11Ds, and dividend thresholds can feel like walking through a minefield. The increase to 35.75% is just another reminder that the tax landscape is constantly shifting.
At Makes Sense Accountants, we don't just file your returns; we help you plan ahead. Whether you're looking for sole trader support or complex corporate planning, we make sure you understand the "why" behind the numbers.
If you have a Director's Loan Account that’s looking a bit heavy, or if you're worried about how the new rates will affect your year-end, don't wait for the 9-month deadline to creep up on you.
Want to clear the air and keep your cash in your business?
Click here to get in touch with our friendly team today and let’s make sure your accounting always makes sense.