Does the New Section 455 Tax Rate Really Matter? Why Director Loans Just Got More Expensive in 2026

27 May Does the New Section 455 Tax Rate Really Matter? Why Director Loans Just Got More Expensive in 2026

If you run your own limited company, you’ve probably used a Director’s Loan Account (DLA) at some point. It’s one of the perks of being the boss, the ability to borrow money from your own business to cover a personal expense, tide you over until a big invoice lands, or simply to manage your personal cash flow.

But as of April 2026, the rules of the game have shifted. If you’ve heard rumblings about the section 455 tax rate increasing and wondered if it actually impacts your back pocket, the short answer is: yes, it does. While Section 455 tax is technically "temporary," the cost of carrying a loan from your company just got significantly more expensive.

At Harrison's Accountancy, we’re all about taking the anxiety out of your accounts. So, let’s break down exactly what has changed, why it matters, and how you can avoid a nasty surprise from HMRC.

What on earth is Section 455 tax?

Think of Section 455 as HMRC’s way of making sure you don’t use your company as a tax-free personal bank account.

In the UK, when you take money out of your company, you usually do it via salary (which incurs PAYE and National Insurance) or dividends (which incur dividend tax). However, a director’s loan isn't a payment; it’s a debt. Because there’s no immediate tax on a loan, HMRC keeps a close eye on it.

If you borrow money from your company and don't pay it back within a specific timeframe, the company has to pay a special tax called Section 455. It’s a "loans to participators" tax designed to discourage people from leaving personal debts to their company outstanding indefinitely.

The 2026 Update: From 33.75% to 35.75%

The section 455 tax rate has officially climbed, tracking the higher rate of dividend tax.

For several years, the Section 455 rate sat comfortably at 32.5%. It then moved to 33.75%. But as of April 6, 2026, any new loans advanced that remain outstanding at the trigger point are now subject to a 35.75% tax rate.

Why the increase? HMRC likes to keep the Section 455 rate aligned with the higher rate of dividend tax. If the tax on a loan were significantly cheaper than the tax on a dividend, everyone would just "borrow" money forever instead of declaring dividends. By raising the rate to 35.75%, the government ensures there’s no sneaky tax advantage to leaving a loan unpaid.

Does a 2% jump really matter?

You might think, "It’s only 2%, Dan. Is that a big deal?"

Let’s look at the numbers. If you have an overdrawn director's loan of £50,000 that isn't repaid in time:

• At the old rate (33.75%): Your company would owe HMRC £16,875.
• At the new rate (35.75%): Your company now owes £17,875.

That is an extra £1,000 of your company's hard-earned cash that is now sat with HMRC instead of being invested back into your business or sitting in your offset mortgage. While you can eventually get that money back (more on that later), it is a massive hit to your company's liquid cash flow in the meantime.

The 9-Month Deadline: Your Grace Period

You don’t pay Section 455 tax the moment you take a loan; you only pay it if the loan is still there 9 months later.

The "trigger point" for Section 455 tax is 9 months and 1 day after the end of your company’s accounting period.

For example, if your company year-end is December 31, 2026, you have until October 1, 2027, to either:

1. Pay the money back in cash.
2. Clear the loan by declaring a dividend.
3. Clear the loan via a salary/bonus payment.

If the loan is still "live" on that October date, the 35.75% tax kicks in. It’s reported on your Corporation Tax return (CT600) and must be paid at the same time as your usual business tax.

The "Bed and Breakfasting" Trap

Think you can just pay it back today and take it out again tomorrow? HMRC is one step ahead of you.

In the past, some directors tried to be clever. They would "repay" the loan just before the 9-month deadline to avoid the tax, then immediately "re-borrow" the same amount a few days later. This is known as "bed and breakfasting."

HMRC has heavily tightened the rules (specifically the Targeted Anti-Avoidance Rule, or TAAR) to stop this. If you repay a loan of £5,000 or more and then take out a similar amount within 30 days, HMRC will essentially ignore the repayment. They’ll treat it as if the loan was never paid back, and you’ll still be hit with the 35.75% tax.

Furthermore, if there was an intention to re-borrow the money at the time of repayment: even if it's more than 30 days later: HMRC can still apply the tax. They are looking for "substance over form." If it looks like a tax-avoidance loop, they will treat it like one.

Why This Hits the Media & Entertainment Industry Hard

At Harrison's Accountancy, we work with many clients in the media and entertainment industry. Whether you're a freelance producer, a specialized consultant, or run a small production house, your income can be "lumpy."

You might have a massive contract land in January, followed by three months of quiet. It’s very tempting during those quiet months to dip into the company coffers via a director’s loan to keep your personal life running smoothly.

However, with the section 455 tax rate now at 35.75%, this "lumpy" income strategy needs much tighter management. If you don't have the reserves to clear that loan by your year-end, you could find your company facing a tax bill that rivals the loan itself.

Getting Your Money Back: The Refund Process

The good news? Section 455 tax is not a permanent "fine." It’s more like a very expensive, interest-free deposit held by the government.

When you eventually repay the loan to the company (or "write it off": though that has its own tax implications for you personally), the company can reclaim the Section 455 tax it paid to HMRC.

However, there’s a catch. You can’t get the refund instantly. You can only claim it 9 months and 1 day after the end of the accounting period in which the loan was repaid.

So, if you pay the tax in 2027 and repay the loan in 2028, you might not see that refund until 2029. This is why we call it a "cash flow killer." Your money is stuck in HMRC’s bank account instead of yours for years.

How to Manage Your Director's Loan in 2026

So, how do you navigate these new, more expensive waters? Here are our top tips for business owners:

1. Use Xero to Track Everything: As Xero Platinum Champion experts, we always recommend keeping a real-time eye on your DLA. If you wait until your accountant does your year-end to find out you're £20,000 overdrawn, it might be too late to plan a tax-efficient repayment.
2. Timing is Everything: If you're planning a large personal purchase (like a house deposit), talk to us before you take the money. We can help you decide if a dividend or a loan is the most cost-effective route given the current 35.75% rate.
3. The £10,000 Limit: Don't forget that if your loan exceeds £10,000 at any point, it's also considered a "Benefit in Kind." This means you personally might have to pay income tax on the "interest" you aren't paying the company, and the company has to pay Class 1A National Insurance.
4. Clear it with Dividends: If your company has enough profit (distributable reserves), the cleanest way to clear a loan is often to declare a dividend. This swaps the loan for a permanent payment, avoiding Section 455 entirely.

How Harrison's Accountancy Can Help

Navigating tax changes like the section 455 tax rate hike can feel like walking through a minefield. One wrong step and you’re looking at a five-figure tax bill you hadn't budgeted for.

As award-winning Chartered Accountants, we act like your own personal CFO. We don't just "do the books"; we look ahead. We’ll alert you if your director’s loan is creeping up and help you plan the most tax-efficient way to settle it before the 9-month deadline hits.

Whether you're a sole trader in Biggleswade or a limited company in London, we provide a personalized, professional service that keeps you compliant and keeps your cash flow healthy.

Ready to get your accounts in order?
Book a call with Dan and the team today to discuss your director's loan account and ensure you're protected from the 2026 rate hike.