Why directors need to be aware of the increased loan tax charge

We have officially entered the 2026/27 tax year and it has introduced a fair few reforms that directors need to keep on top of.

We are noticing that one change seems to have fallen out of the spotlight and this is the two per cent increase in the tax charge on directors’ loans, which came into effect on 6 April 2026.

This might seem like a minor adjustment, but it has the potential to affect your cash flow and tax efficiency if not managed properly.

What is a director’s loan account?

A director’s loan account is a record of all financial transactions between you and your company.

This will track all the money you have put into the business and anything you have taken out that isn’t salary, dividends or reimbursed expenses.

When your withdrawals exceed your contributions or what you have earned, your account will become overdrawn.

What is the Section 455 (S455) charge?

If this loan is not repaid within nine months and one day after the end of your accounting period, HMRC will apply a tax charge under Section 455 of the Corporation Tax Act 2010.

This S455 charge will be calculated as a percentage of the outstanding balance.

The charge is only temporary and you will be able to reclaim it once the loan is repaid.

However, that can take time and the funds being held with HMRC could affect your business’s cash flow.

What changes has the new tax year brought?

Since 6 April 2026, the S455 tax rate has increased by two per cent from 33.75 per cent to 35.75 per cent and this will affect loans made on or after this date.

We know that a two per cent increase may seem small, but you will soon feel the impact if it affects you.

For example, an overdrawn loan of £50,000 would now trigger a tax charge of £17,875, which is compared to £16,875 previously.

How can you stay ahead of this charge?

The most effective way to get ahead of this charge is to review your loan account regularly.

You should not be waiting until the nine-month deadline is up and you need to start preparing a plan on how to manage the repayments.

This could include clearing the balance through dividends (if profits allow), adjusting your salary or making direct repayments.

If you are looking for a more tax-efficient way to extract funds, you could charge interest on your director’s loans and this will reduce the company profits that are subject to Corporation Tax.

However, these interest payments must be reported to HMRC, typically through CT61 or digital submissions.

How can we help you manage your director’s loans?

We know it can feel overwhelming trying to stay on top of all these new reforms and deadlines and we are here to help you manage them.

Our professional team can advise you on what the new increase means for you and the most tax-efficient way to extract funds.

We can also ensure you remain compliant with HMRC deadlines and reporting and help you plan your repayments, ensuring they do not damage your cash flow.

Let us help you continue to use director’s loans efficiently and without any unnecessary tax surprises.

For further advice or support on the director’s loan tax charge, contact our team.