Shareholder Loans and Section 455 Tax
When a shareholder borrows money from their company, specific tax rules apply. This guide covers Section 455 Corporation Tax, benefit in kind charges, and how to manage shareholder loans properly.
A shareholder loan arises when a shareholder of a company borrows money from the company, or when the company owes money to the shareholder. In most owner-managed businesses, the shareholder and director are the same person, and the transaction is tracked through the director’s loan account (DLA).
The tax treatment of shareholder loans depends on the direction of the loan — whether the company is lending to the shareholder or the shareholder is lending to the company — and on the shareholder’s percentage of ownership.
When the Company Lends to a Shareholder
When a company lends money to a participator (a shareholder with at least 5% of the share capital, or their associates), the loan is treated as a close company loan under Section 455 of the Corporation Tax Act 2010 (previously Section 419 ICTA 1988).
Section 455 Tax Charge
If the loan remains outstanding 9 months and 1 day after the end of the company’s accounting period, the company must pay a Section 455 tax charge of 33.75% of the outstanding loan balance.
| Scenario | Amount | Section 455 Tax |
|---|---|---|
| Loan of £10,000 outstanding at year-end | £10,000 | £3,375 |
| Loan of £25,000 outstanding at year-end | £25,000 | £8,438 |
| Loan of £50,000 outstanding at year-end | £50,000 | £16,875 |
This tax is paid alongside the company’s Corporation Tax and is effectively a temporary tax charge — it is refundable once the loan is repaid or written off.
Refund Timing
The Section 455 tax refund is not immediate. HMRC repays it 9 months after the end of the accounting period in which the loan is cleared. For a company with a 31 March year-end:
| Event | Date |
|---|---|
| Year-end | 31 March 2026 |
| Loan outstanding — Section 455 tax due | 1 January 2027 |
| Shareholder repays loan | 15 September 2026 |
| Section 455 refund issued | 1 January 2028 |
This delay means the company’s cash is tied up even after the loan has been repaid.
Benefit in Kind
If a shareholder loan exceeds £10,000 at any point during the tax year and the company charges no interest (or interest below the HMRC official rate, currently 2.25%), the shareholder is treated as receiving a benefit in kind (BIK).
The consequences are:
- The benefit must be reported on the shareholder’s P11D
- The shareholder pays Income Tax on the deemed interest benefit
- The company pays Class 1A National Insurance at 13.8% on the benefit
Avoiding the BIK Charge
The simplest way to avoid a benefit in kind charge is to keep the loan balance below £10,000 at all times. Alternatively, the company can charge interest at the HMRC official rate. The interest is then:
- Taxable income for the shareholder
- Deductible as an expense for the company (for Corporation Tax)
- Subject to 20% Income Tax deduction at source by the company (reported via form CT61)
Writing Off a Shareholder Loan
If the company writes off a shareholder loan, the tax consequences depend on whether the shareholder is also a director:
| Circumstance | Treatment |
|---|---|
| Shareholder-director | Amount treated as a distribution (taxed as a dividend) |
| Non-director shareholder | Amount treated as a distribution |
| Shareholder with employment | May also trigger NIC if treated as earnings |
The company can claim a Corporation Tax deduction on the amount written off. Any Section 455 tax already paid becomes refundable.
Writing off a loan is generally less tax-efficient than having the shareholder repay it, because the write-off triggers an immediate income tax charge on the shareholder.
Bed and Breakfasting Rules
HMRC introduced anti-avoidance rules under Section 464A CTA 2010 to prevent shareholders from temporarily repaying a loan before the Section 455 deadline and then borrowing again.
The rules apply when:
- A shareholder repays £5,000 or more of a loan
- Within 30 days, the shareholder borrows £5,000 or more from the company
If both conditions are met, the repayment is disregarded for Section 455 purposes — the tax charge still applies as if the loan had never been repaid.
Additional Anti-Avoidance
A separate provision (Section 464B CTA 2010) addresses arrangements to replace one loan with another. If a loan is repaid but new loans of £15,000 or more are made within the same or next accounting period, and the total of new loans exceeds the repayments, Section 455 continues to apply.
When the Shareholder Lends to the Company
A shareholder can lend money to their company at any time. This is common when:
- Funding a startup — The shareholder puts personal savings into the company
- Cash flow support — The shareholder covers a temporary shortfall
- Avoiding external borrowing — The shareholder prefers to lend rather than the company taking a bank loan
The company records the loan as a creditor on the balance sheet. The shareholder can withdraw the money at any time as a repayment of the loan without triggering any tax charge.
Charging Interest
If the shareholder charges interest on money lent to the company:
| Aspect | Treatment |
|---|---|
| Company | Deducts 20% Income Tax at source; claims Corporation Tax relief on the interest |
| Shareholder | Declares gross interest on self-assessment return |
| Rate | Must be at a commercial rate — HMRC may challenge excessive rates |
This can be a tax-efficient way to extract money from the company, particularly if the shareholder is a basic-rate taxpayer (since the 20% deducted at source covers their full tax liability on the interest).
Share Capital vs Shareholder Loans
When funding a company, a shareholder can contribute as share capital or as a loan. The key differences are:
| Feature | Share Capital | Shareholder Loan |
|---|---|---|
| Returns | Dividends (discretionary) | Interest (contractual) |
| Repayment | Only via share buyback or liquidation | Repayable at any time |
| Tax relief for company | No deduction for dividends | Interest is deductible |
| Priority on insolvency | Last to be repaid | Repaid before shareholders (but after secured creditors) |
| Flexibility | Cannot be easily returned | Can be drawn and repaid freely |
In practice, many owner-managed businesses use a combination — minimal share capital plus a shareholder loan for the bulk of the funding. This provides flexibility to withdraw funds as loan repayments without the restrictions that apply to returning share capital.
Accounting Treatment
Company Lends to Shareholder
When the loan is made:
Debit: Shareholder loan (debtor)
Credit: Bank
When the shareholder repays:
Debit: Bank
Credit: Shareholder loan (debtor)
The outstanding loan appears as a current asset (debtor) on the balance sheet if repayment is expected within 12 months, or a non-current asset if longer.
Shareholder Lends to the Company
When the shareholder lends money:
Debit: Bank
Credit: Shareholder loan (creditor)
When the company repays:
Debit: Shareholder loan (creditor)
Credit: Bank
The outstanding loan appears as a current liability (creditor) on the balance sheet.
Disclosure Requirements
Shareholder loans must be disclosed in the company’s annual accounts:
- The balance at the start and end of the year
- Interest charged during the year
- The terms of the loan (including repayment terms and interest rate)
- Any amounts written off
For close companies (most owner-managed businesses), additional disclosure is required in the Corporation Tax return (CT600) to report loans to participators.
Common Mistakes
- Not tracking the DLA balance — Every personal expense paid by the company adds to the shareholder loan
- Missing the 9-month repayment deadline — Triggering an avoidable Section 455 tax charge
- Exceeding £10,000 without charging interest — Creating a benefit in kind
- Cycling money in and out — The bed and breakfasting rules catch artificial repayment arrangements
- Confusing loan repayment with dividends — A shareholder can repay themselves money they have lent to the company tax-free, but must not treat dividend-equivalent withdrawals as loan repayments