Clear loan accounts before tax hike
The end of the tax year means one thing - finalising your profit extraction plan. Your director’s loan account is overdrawn but you know you have several months to pay it off. Can you save money by paying it now?
Tax increase
The rate of tax payable on dividends will increase with effect from 6 April 2026. The dividend rates for basic and higher rate taxpayers will rise by 2% to 10.75% and 35.75% respectively. There are no changes to the additional rate which will remain at 39.35%.
This increase has a knock-on effect on the tax paid by companies on directors’ loans (known as the s.455 tax), which is tied to the dividend higher rate.
Participators only
The s.455 tax is a temporary tax, payable by companies for loans and other credit advanced to “participators” of a close company (a company that’s controlled by five or fewer individuals). Broadly, a participator is someone who controls 5% or more of the share capital. Or to put it simply, most owner-managers.
The charge is only payable if a loan account remains overdrawn nine months and one day after the end of the accounting period.
S.455 tax is repayable when the loan is repaid or released. The downside is that it does of course impact the company’s cash flow.
New loans
Loans advanced from 6 April 2026 that aren’t repaid by the relevant deadline will attract a s.455 charge at the new rate of 35.75%. If you plan to borrow money from your company anyway, doing so prior to 6 April 2026 could save your company 2% later on.
Repayments
To get your company out of paying the charge, the best course of action is to make sure you settle your debt before the deadline.
If you can’t find the cash to do so you may be able to clear the loan account by declaring a dividend. There’s no need to pay the cash to yourself and then back to the company, a book entry will suffice.
Ordinarily, anti-avoidance rules prevent you from repaying a loan and then borrowing further funds within prescribed limits. If you use the dividend method you can borrow from the company again and s.455 anti-avoidance rules don’t apply. The dividend method is only possible if your company has sufficient reserves.
Cheaper dividends
If you’re clearing your loan account with a dividend it may be cheaper to do so prior to 6 April 2026 to take advantage of the current, lower rates.
Example. Tony is the sole shareholder of Acom Ltd. In June 2025 he borrowed £15,000 from Acom, and intends to declare a dividend to settle the debt. Tony is a higher rate taxpayer in 2025/26 and 2026/27. If he declares a £15,000 dividend before 6 April 2026, it will be taxed at 33.75%, costing £5,062. Whereas if he waits until after the start of the new tax year, it will be taxed at 35.75%, costing £5,362, an extra £300.
Related Topics
-
Should you voluntarily payroll benefits in kind?
The window to sign up to voluntarily payroll non-mandatory benefits in kind for 2027/28 will open in November. Is it worth volunteering to pay HMRC earlier than required or should you wait until it becomes mandatory in 2028/29?
-
Wise tax statement errors could affect 4,000 customers
Around 4,000 UK customers of financial services provider Wise have been told that tax statements issued between 2021 and 2025 contained incorrect figures. The errors could have resulted in taxpayers paying too much or too little income tax and capital gains tax (CGT). What should affected customers check?
-
CT61