October 1, 2026/
Business & Tax News and Developments September 2026 Home News Business &...
An overdrawn director’s loan account can leave owner-managed companies with an awkward decision: should the company write off the loan, clear it through salary or dividends, or leave the balance outstanding and deal with the Section 455 tax charge?
Writing off the loan can appear attractive, particularly where the company does not have sufficient distributable reserves to declare a dividend. However, the tax consequences are more complicated than simply treating the write-off as a dividend.
For many director-shareholders, the right decision depends on the interaction between income tax, National Insurance contributions (NIC), Section 455 tax and the director’s wider tax position.
Gifting property to children in the UK can trigger Capital Gains Tax, Inheritance Tax, and potentially Stamp Duty Land Tax depending on the type of property and how the transfer is structured. Gifting a main residence may qualify for full Principal Private Residence (PPR) relief, whereas gifting an investment property can create an immediate CGT liability based on market value. Careful planning is essential to avoid unexpected tax costs and anti-avoidance rules.
Where a close company writes off or releases a loan made to a participator, broadly a shareholder or someone connected with a shareholder, the amount written off is generally treated as income of the participator.
For income tax purposes, the amount is taxed at dividend rates. However, where the borrower is also an employee or director and the write-off represents remuneration or profit derived from the employment, Class 1 National Insurance may also arise.
This creates an unusual hybrid treatment: income tax can apply broadly as it does to a dividend, while National Insurance may apply as it would to employment earnings.
Most family-owned and owner-managed limited companies fall within the definition of a close company, making these rules particularly relevant to director-shareholders with overdrawn loan accounts.
The dividend allowance remains £500 for 2026/27. Where available, the first £500 falling within the allowance is taxed at 0%.
For 2026/27, dividend income above the allowance is taxed at:
The director’s actual tax liability therefore depends on their total income, available allowances and the tax band into which the loan write-off falls.
It is important to remember that the dividend allowance is a 0% tax rate rather than an exemption from taxable income. The income still forms part of the individual’s taxable income and can affect the tax bands available.
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Looking only at dividend tax rates can make a director’s loan write-off appear relatively attractive compared with paying a salary or bonus.
National Insurance, however, needs to be considered separately.
Where a loan to a participator who is also an employee is released or written off, Class 1 NIC can arise where the amount represents remuneration or profit derived from the employment.
For 2026/27, the standard employee Class 1 NIC rates are 8% between the primary threshold and upper earnings limit and 2% above the upper earnings limit. Employer’s Class 1 NIC is generally charged at 15% above the relevant secondary threshold.
The precise NIC liability depends on the director’s existing earnings, applicable thresholds, NIC category and the circumstances surrounding the write-off.
This is why the overall tax cost should be calculated before the company formally releases the debt.
Where a close company makes a loan to a participator and it remains outstanding more than nine months after the end of the relevant Corporation Tax accounting period, a Section 455 tax charge can arise.
For loans made from 6 April 2026, the Section 455 rate is 35.75%.
The rate applying to an existing loan depends on when that loan was originally made. Loans made between 6 April 2016 and 5 April 2022 were generally subject to Section 455 tax at 32.5%, while loans made from 6 April 2022 to 5 April 2026 were generally subject to a 33.75% charge.
Unlike most Corporation Tax liabilities, Section 455 tax is potentially recoverable.
If the loan is subsequently repaid, released or written off, the company can normally claim relief for the corresponding Section 455 tax. However, the timing rules mean that the repayment may not be received immediately.
This makes Section 455 as much a cash-flow consideration as a permanent tax cost where there is a realistic prospect that the loan will eventually be cleared.
There is no universal answer.
An owner-managed company with an overdrawn director’s loan account may potentially:
A director’s loan write-off can create an immediate personal income tax liability and potentially employee and employer NIC. Leaving the loan outstanding may instead leave the company carrying a Section 455 tax charge, but that tax can potentially be recovered when the loan is eventually repaid, released or written off.
The comparison is therefore not simply dividend tax versus Section 455 tax.
The overall cost and cash-flow effect of each option should be considered, including whether Section 455 tax is ultimately recoverable and how long the company may have to wait for recovery.
Assume a director-shareholder has an overdrawn director’s loan account of £20,000.
If the company formally writes off the £20,000, the debt does not simply disappear for tax purposes. The director may become liable to income tax on the amount written off at the applicable dividend rates. Depending on the circumstances, Class 1 NIC may also arise.
The company may face employer’s NIC but could also become entitled to recover Section 455 tax previously paid on the loan.
Alternatively, leaving the £20,000 outstanding avoids triggering the income tax consequences of a write-off at that point. However, the company continues to have cash tied up in the Section 455 charge.
The most appropriate treatment will depend on factors such as:
Two directors with the same £20,000 overdrawn loan can therefore face significantly different tax outcomes.
The National Insurance position requires particular care.
Class 1 NIC is not necessarily due simply because a director’s loan has been written off. The underlying reason for the release matters.
Where the participator is also an employee and the amount released represents remuneration or profit derived from employment, Class 1 NIC can arise.
However, there may be circumstances where a write-off occurs because of the individual’s position as a shareholder rather than their employment.
The distinction should not be assumed merely because the individual is both a director and shareholder. The facts, company documentation and commercial reason for the write-off all matter.
Professional advice should therefore be obtained before a significant director’s loan is formally released rather than attempting to establish the correct treatment afterwards.
An overdrawn director’s loan should not automatically be cleared at the year end simply to produce a cleaner balance sheet.
From a tax planning perspective, the available options should be compared before any entries are made.
The first question is often whether the company has sufficient distributable reserves to declare a lawful dividend. If it does not, simply declaring a dividend to clear the loan is not an available solution.
The next step is to compare repayment, remuneration, a formal loan release and leaving the balance outstanding. Any Section 455 tax already paid should also be identified because the rate originally suffered may differ from the current rate.
This is particularly important for older director’s loans.
The National Insurance position should also be reviewed rather than assumed. A write-off that initially appears attractive when looking only at dividend tax can become considerably more expensive once employee and employer NIC are taken into account.
The best decision is therefore based on the total tax cost, recoverability of Section 455 tax, available company reserves and cash-flow implications, rather than one tax rate in isolation.
Writing off an overdrawn director’s loan can be an effective way of dealing with a longstanding balance, but it should not be treated as a routine bookkeeping adjustment.
A write-off can create personal income tax and potentially National Insurance liabilities. Leaving the loan outstanding, on the other hand, can leave the company funding a substantial Section 455 tax charge.
The most tax-efficient approach depends on the director’s circumstances, the company’s distributable reserves, the age and history of the loan, the original Section 455 rate and whether repayment is realistically expected.
For significant balances, modelling the alternatives before taking action can prevent an unnecessarily expensive tax outcome.
If you have an overdrawn director’s loan account, Naail & Co can review the balance, assess the Section 455 position and compare the tax consequences of repayment, dividends, remuneration and a formal loan write-off.
Getting the treatment right before the transaction is recorded can help avoid unexpected income tax, National Insurance and Corporation Tax consequences.
Get in touch with Naail & Co to book your free initial consultation.
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A director’s loan write-off occurs when a company formally releases a director-shareholder from the obligation to repay an overdrawn director’s loan account. In a close company, the amount written off is generally taxed on the participator at dividend rates. If the write-off is connected with the director’s employment, Class 1 National Insurance contributions may also arise.
Gifting property to children can create an immediate CGT liability if the property is not your main residence. HMRC calculates the gain using the property’s market value at the date of transfer, not the amount paid by the child. Investment properties and buy-to-lets are commonly affected. If the property qualifies fully for Principal Private Residence (PPR) relief, the gain may be exempt from CGT.
A director’s loan write-off may be considered where repayment is unlikely or where other methods of clearing an overdrawn loan are unsuitable. Before proceeding, the company should compare repayment, a lawful dividend, salary or bonus, and leaving the loan outstanding. The director’s tax position, distributable reserves, National Insurance exposure and any Section 455 tax already paid should all be reviewed first.
A director’s loan write-off may be possible even where the company does not have sufficient distributable profits to declare a dividend, but the legal, accounting and tax treatment must be considered carefully. A loan release is not the same as declaring a dividend. The write-off can still create an income tax liability for the director and potentially National Insurance liabilities for both the director and company.
National Insurance may be payable on a director’s loan write-off, but it is not automatic in every case. Where the director is also an employee and the release represents remuneration or profit derived from employment, Class 1 NIC can arise. If the write-off is genuinely made in the individual’s capacity as a shareholder, the NIC treatment may differ. The underlying facts and documentation are therefore important.
Section 455 tax is relevant because a close company may already have paid tax on an outstanding loan to a participator. If the loan is subsequently repaid, released or written off, the company can generally claim corresponding Section 455 relief, subject to HMRC’s timing rules. For loans made from 6 April 2026, the Section 455 rate is 35.75%, although older loans may have been charged at earlier rates.
The tax cost of a director’s loan write-off depends on the amount released and the director’s wider tax position. The amount is generally taxed at dividend rates, while Class 1 employee and employer NIC may also arise depending on the circumstances. The company may, however, recover Section 455 tax previously paid. A proper calculation should therefore consider all these elements rather than dividend tax alone.
Yes, an overdrawn director’s loan can remain outstanding, but this can have significant tax consequences. Where a close company loan to a participator remains unpaid more than nine months after the end of the relevant accounting period, Section 455 tax may become payable. Leaving the loan outstanding can sometimes be preferable to an immediate write-off, particularly where repayment is expected and the Section 455 tax can ultimately be recovered.
Common mistakes include writing off the loan without calculating the full tax cost, assuming National Insurance always or never applies, and overlooking Section 455 relief. Companies may also incorrectly use dividends to clear a director’s loan despite insufficient distributable reserves. Another risk is treating a longstanding loan as a simple bookkeeping balance rather than considering its Corporation Tax, income tax, NIC and company law consequences.
A director’s loan write-off should be formally approved, properly documented and correctly reflected in the company’s accounts and tax filings. Before implementation, the company should establish the outstanding balance, review any Section 455 tax previously paid, assess the director’s income tax and NIC position, and compare alternative ways of clearing the loan. Significant write-offs should be reviewed with a tax adviser before the accounting entries are made.
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