Writing off a director’s loan - Landlords Financial | Landlords Bookkeeping Accountants

In a personal or family company, there are often transactions between the company and the director(s). For example, the company may meet personal expenses on the director’s behalf, or the director may loan money to the company to help cash flow.

It is important to keep track of transactions between the director and the company. This is done by means of a director’s loan account. Where the director’s loan account is overdrawn there may be tax consequences for the director and the company.

If the outstanding loan balance exceeds £10,000 at any point in the tax year, the director may face a tax charge under the benefit in kind provisions. The company must also pay Class 1A National Insurance contributions at 15% on the taxable amount.

If the account is overdrawn at the year end and remains so at the corporation tax due date nine months and one day after the year end, the company must pay section 455 tax on the outstanding loan balance. The rate of section 455 tax is aligned with the dividend upper rate – 35.75% for 2026/27.

Writing off the loan

At first sight, writing off the loan may seem a simple solution to avoiding the section 455 tax. However, this too has tax consequences.

Where a director’s loan is waived, released or written off, the director is treated as if they have received a distribution equal to the amount written off. The director is taxed at the dividend tax rates. Where the write-off takes place on or after 6 April 2026, the deemed distribution will be taxed at 10.75% where it falls within the basic rate band, at 35.75% where it falls within the higher rate band and at 39.35% where it falls in the additional rate band. The director must declare the loan write-off on their Self-Assessment tax return.

Where the director is also an employee, a tax charge could also arise in respect of the written off loan under the employment income rules. However, the distribution rules take precedence, so the director does not suffer a double tax charge.

From the company’s perspective, as the write-off is treated as a distribution, the amount written off is not deductible in computing the company’s profits chargeable to corporation tax. If the loan was one in respect of which the company had previously paid section 455 tax, that tax would become repayable nine months and one day after the end of the tax period in which the loan was written off. The repayment must be claimed.

National Insurance

There is also a National Insurance cost for both the director and the company in writing off a director’s loan. Although for income tax purposes, the loan write-off is

treated as a distribution, for National Insurance purposes, it is treated as a payment of earnings on which Class 1 National Insurance contributions are payable by both the director and the company (as the employer).

It may be possible to argue that the write-off is shareholders’ funds rather than earnings and is not related to the director’s work for the company. If HMRC accept this to be the case, there will be no National Insurance to pay.

A better solution

If the director is taxed at the dividend upper or additional rates on the deemed distribution, it may be preferable to leave the loan outstanding and pay the section 455 tax. Unlike a loan write-off, there will be no National Insurance to pay. If the director is able to pay off the loan at a later date, the section 455 tax will be repaid.

Writing off a director’s loan - Landlords Financial | Landlords Bookkeeping Accountants

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