Corporation Tax UK-wide

Close company tax rules for owner-managed businesses

What close company status means for your tax obligations, including Section 455 tax on director's loans.

Guide summary

If you borrow money from your company and it is not paid back by the end of the accounting period, your company must pay a 33.75% tax on the amount over £10,000. This tax is refunded later but ties up cash. You can avoid it by repaying the loan, paying yourself a dividend, or processing it as salary before the year end. Do not repay and then borrow again within 30 days – HMRC will treat the loan as never repaid.

  • Pay 33.75% tax on director's loans over £10,000 at year end
  • Clear loans before year end with dividends, salary, or repayment
  • Do not repay and re-borrow within 30 days (bed and breakfasting rule)
  • Report benefit in kind if loan over £10,000 and interest below official rate (3.75%)
  • Reclaim Section 455 tax 9 months after year end when loan repaid
  • Section 455 tax rises to 35.75% for loans from 6 April 2026
  • Charge interest at HMRC official rate to avoid benefit in kind
  • Keep records of director's loan account each year
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Director's loans

Tax implications when directors borrow from or loan money to their limited company.

What is a close company

A close company is one controlled by 5 or fewer participators (broadly, shareholders or people with rights over the company), or by any number of participators who are also directors. The vast majority of owner-managed limited companies in the UK are close companies.

Being a close company is not a problem in itself, but it triggers specific tax rules designed to prevent shareholders from extracting profits in tax-advantageous ways.

Director's loan accounts

The most common close company tax issue is the director's loan account. When a director or shareholder withdraws money from the company that is not salary, dividends, expense reimbursement, or repayment of money previously lent to the company, it creates a director's loan.

If the loan account has a debit balance (the director owes the company) at the end of the accounting period, the company faces a Section 455 tax charge.

How to manage director's loans

There are several ways to clear a director's loan before the year end:

  • Declare dividends: Vote a dividend sufficient to clear the loan balance (subject to distributable profits)
  • Process as salary: Run the amount through payroll (subject to income tax and NIC)
  • Repay the loan: Transfer personal funds back to the company
  • Offset against expenses: Claim legitimate business expenses owed to you by the company

Warning: The bed and breakfasting rule means you cannot repay a loan and then re-borrow within 30 days to avoid the Section 455 charge. HMRC treats such arrangements as if the loan was never repaid.

Benefits in kind for director's loans

If a director or employee has an outstanding loan from the company exceeding £10,000 at any point during the tax year, and the company does not charge interest (or charges below HMRC's official rate), there is a benefit in kind. This must be reported on form P11D and the director pays income tax on the benefit.

The company may also owe Class 1A National Insurance on the benefit.

Distributions by close companies

Close company rules also affect how certain payments are classified. Some arrangements that would otherwise be treated as loans or other transactions may be reclassified as distributions (dividends) by HMRC, which changes their tax treatment.

Seek professional advice if you are structuring complex arrangements involving loans, share buybacks, or other transactions between you and your close company.

Directors' loans (opens in a new tab)

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