The new 2026/27 tax year has finally arrived and it has brought an array of tax changes with it.
Many reforms have been the topic of conversation for some time but one change that we have seen potentially slip under the radar is the two per cent increase in the tax charge on directors’ loans.
This increase came into effect on 6 April 2026 and directors need to be aware of how to manage this charge effectively.
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, alongside anything you have taken out that isn’t salary, dividends or reimbursed expenses.
If you take out more than you have put in or earned, the account will become overdrawn.
Directors have nine months after the end of their accounting period to pay back an overdrawn loan account.
The second it hits nine months and one day, HMRC will apply a tax charge under Section 455 of the Corporation Tax Act 2010 and this will be calculated as a percentage of the outstanding balance.
The good news is that this charge is temporary and can be reclaimed once the loan is repaid.
However, it can still put pressure on your cash flow while the funds are held by HMRC.
Since 6 April 2026, the S455 tax rate has risen from 33.75 per cent to 35.75 per cent and this charge will apply to loans made on or after this date.
A two per cent increase might seem modest, but it can have a noticeable impact if it is not managed effectively.
For example, an overdrawn loan of £50,000 would now trigger a tax charge of £17,875, which is compared to £16,875 previously.
There are many ways to minimise the impact of this charge and a good starting point is reviewing your loan account regularly.
You should not be waiting until the nine-month deadline is up and acting early can help you create an effective plan to manage the payments.
This plan could involve clearing the balance through dividends (if profits allow), adjusting your salary or making direct repayments.
Another option could be charging interest on the loan. This can be a more tax-efficient way of extracting funds and will reduce the company’s profits that are subject to Corporation Tax.
However, these interest payments must be reported to HMRC, typically through CT61 or digital submissions.
We know it can feel hard to keep track of all the changes being introduced this tax year and the S455 increase can feel like another weight on your shoulders.
Our professional team are on hand to advise 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.
We want to 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.
