If you’re a company director, it’s not unusual to take money out of your business from time to time. It can happen for a few reasons. You might have accidentally paid for a personal expense using the company card, taken funds that need to be recorded through your director's loan account, or drawn money before finalising whether it’s salary or dividends. 

While these situations are common, they can sometimes lead to an overdrawn director’s loan account. Something you want to avoid, because if that balance isn’t repaid within a certain timeframe, your company could face an additional charge known as S455 tax.

Why S455 tax catches directors out

S455 tax often catches directors by surprise. After all, it’s easy to assume that money taken from your own company is simply “yours”. In reality, a Limited Company is a separate legal entity, and HMRC treats money taken from the business in specific ways depending on how it’s recorded and repaid. 

As a result of this, what feels like a normal transfer or temporary withdrawal can unintentionally become a tax issue if it isn’t managed properly through the director’s loan account.

What is the S455 tax?

If you’re looking at the screen thinking “what on earth is S455 tax?”, you’re not alone, but we promise it’s simpler than it looks. It’s just a type of Corporation Tax charge that applies if a director or shareholder takes money out of a close company and doesn’t repay it before the deadline. 

It’s called S455 tax because it comes from Section 455 of the Corporation Tax Act, which is why it’s often shortened to make it easier. 

What is a “close company”?

It’s basically HMRC’s way of describing a small, owner-managed Limited Company. It usually means the business is controlled by five or fewer shareholders, or by the directors themselves. This means if you run your own Limited Company, you’re almost definitely in this category. 

What is a director’s loan account?

It’s a record of money that moves between a shareholder or director and a company, outside of things like salary, dividends, or reimbursed business expenses. It’s a log that covers both money going out and repayments coming back in. 

It can sit in one of two positions:

S455 tax becomes relevant when the account is overdrawn, and the balance is not repaid within HMRC’s required timeframe. 

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Common reasons this happens include:

• Using company funds for personal spending.
• Taking money from the business bank account without declaring it as salary or dividends.
• Drawing income before profits are confirmed.
• Mixing business and personal transactions unintentionally.

In some cases, directors don’t realise their loan account is overdrawn until the Year End accounts are prepared. However, it’s important to note that an overdrawn director’s loan account at Year End does not automatically trigger S455 tax. 

The company has a set repayment window after the accounting period ends to clear the balance. If the director/shareholder fully repays within the HMRC timeframe, you usually won’t receive a S455 tax charge. There are some exceptions, such as “bed and breakfasting” which we’ll cover later. 

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How much is the S455 tax?

The S455 tax rate is linked to the higher rate of dividend tax and is applied to the outstanding balance unpaid after the deadline. So really it’s in your best interest to pay it off quickly, otherwise, the company could face a bigger tax charge. 

For example, if a director owes £15,000 to the company after the repayment deadline, the company may face a significant S455 tax charge based on that amount.

As tax rates and thresholds can change, it’s always important to refer to HMRC guidance or speak to an experienced accountant when calculating any potential liability. 

An example of S455 tax in practice

Let’s say your company’s accounting period ends on 31 March. At that point, your director’s loan account is overdrawn by £10,000. You then have a period after the Year End in which to repay the loan in full.

If the £10,000 is still outstanding after the S455 deadline, the company may need to pay S455 tax on that balance.

While the company can usually reclaim this tax later once the loan is repaid, it can still create an upfront cash flow pressure.

Can you reclaim it if you repay it?

S455 tax is generally a temporary charge. If the director’s loan is fully repaid, written off, or released, the company can usually reclaim the S455 tax from HMRC.

However, the relief is not immediate. In most cases, the company can only claim the repayment once the loan has been cleared and reported in the relevant Corporation Tax return period.

How is S455 tax reported?

It’s reported through the company’s Corporation Tax return. This is typically done using the relevant supplementary pages, where any outstanding loans to participants are declared.

Accurate bookkeeping is crucial here. Keeping a clear and up-to-date director’s loan account makes it much easier to identify issues early and avoid unexpected tax charges. 

Are there any other tax implications?

Yes, potentially. If a director owes more than £10,000 to the company and no or low interest is charged, the loan may be treated as a beneficial loan. 

This can lead to:

• A Benefit-in-Kind (BIK) charge for the director.
• Class 1A National Insurance contributions for the company.
• Additional reporting requirements. 

So even if S455 tax is avoided, there can still be tax consequences to consider. You can learn more about HMRC’s official director’s loan interest rate here.

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How can you clear an overdrawn director’s loan account?

There are a few common ways to clear an overdrawn balance:

Repay the balance

The simplest option is to repay the amount owed back into the company. If done correctly and on time, it can prevent S455 tax from arising. 

Declare dividends

If the company has sufficient distributable profits, dividends can be used to clear the loan account. However, dividends must be properly documented and only declared from available profits.

Pay salary or bonus

A salary or bonus can be used to reduce or clear the balance. Please note, though, that this can trigger PAYE and National Insurance liabilities, so it’s not always the most tax-efficient option. 

The right approach depends on the company’s financial position and overall tax planning. We’d recommend speaking to a qualified Limited Company accountant who can advise the best solution for you.

Watch out for “bed and breakfasting”

Some directors try to avoid the S455 tax by repaying a loan just before the deadline, then withdrawing the funds again shortly afterwards. HMRC has strict anti-avoidance rules designed to prevent this, often referred to as “bed and breakfasting”. 

In certain cases, HMRC may treat the repayment as ineffective for tax purposes if it is followed by a new withdrawal within a short period. Basically, temporary repayments designed purely to avoid the S455 tax charge may not work as intended.

What directors need to remember

While the idea of S455 tax might sound scary and complicated, it really comes down to keeping a clear line between you and your company’s money.

It is easy for things to blur in a small business. A few personal spends, a transfer here and there, and suddenly your director’s loan account needs attention. That is usually where issues start, not from anything deliberate, but from it slipping off the radar.

The simplest way to stay on top of it is to check your director’s loan account during the year, not just when the accounts are being prepared. You do not need to obsess over it, just enough visibility to stop it quietly building up in the background.

If it does go overdrawn, it is usually fixable. The key thing is timing. The longer it is left, the fewer straightforward options you tend to have. You’ll find that it’s less about complexity and more about staying aware of what is happening as you go.

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