From April 2026, the tax payable by companies on overdrawn director’s loan accounts (“section 455 tax”) is increasing by 2%, from the current rate of 33.75% to 35.75%. The rate applies to amounts drawn from 6 April 2026 onwards and mirrors the increase in the rate of Income Tax payable by individuals on dividend income.
This tax charge can be escaped if the amount drawn is repaid within nine months of the end of the accounting period in which the loan is made.
In addition, a benefit in kind arises on loans over £10,000, unless appropriate interest is charged.
Complications during insolvency
Especially for insolvent companies, overdrawn directors’ loan accounts can become problematic. The loan is not extinguished by entry into liquidation or administration, with the loan continuing to be an asset of the company. The director(s) will be expected to repay the amounts owned, with a risk of personal bankruptcy if repayment cannot be made.
While a company may decide to write off an overdrawn director’s loan, liquidators have a legal duty to pursue every possible avenue that may lead to creditors being satisfied. This can lead to individual directors being pursued for debts owed due to overdrawn loan accounts, even where previously written off. For a struggling company, an overdrawn loan account can be seen as a misuse of company funds and a breach of the directors’ fiduciary duty.
Even if acceptable on both sides, there are also tax implications of a write-off, which is treated as a deemed dividend for Income Tax purposes, taxable on the director – typically at the same 35.75% rate for higher-rate taxpayers.
Planning is crucial
If you have any concerns regarding the use of director’s loans – either in the context of a potential insolvency or routinely – or you would like assistance with wider remuneration planning, please feel free to get in touch.
