S455 Tax: The Hidden Cost of Overdrawn Director's Loans

If you’ve borrowed money from your limited company, you might have heard your accountant mention "S455 tax." It sounds technical, but it’s actually a very simple (and expensive) rule designed to stop directors from using their company like a tax-free bank account indefinitely.

What is S455 Tax?

S455 is a temporary tax that your company must pay to HMRC if a director's loan remains unpaid 9 months and 1 day after the end of your company's accounting period.

Unlike the personal interest rate rules (which only kick in over £10,000), S455 tax applies to every single penny of an unpaid loan.

The 2026 Rate Increase

Because this tax is linked to dividend rates, the cost is about to go up.

• Loans made before 6 April 2026: Charged at 33.75%.
• Loans made on or after 6 April 2026: Charged at 35.75%.

The Real Cost of S455 Tax
To put that rate increase into perspective: if you owe your company £10,000 and don't pay it back on time under the new 2026 rates, your company has to send HMRC a cheque for £3,575.

Can You Get the Money Back?

Yes. The good news is that S455 is a temporary tax. Once you repay the loan to the company, you can reclaim the tax from HMRC.

However, you can only make the claim via your Corporation Tax return. Even if you file immediately, HMRC typically won't release the funds until 9 months after the end of the year in which the repayment happened. That is a long time for your business cash to be tied up.

How to Avoid the S455 Trap

The "9-month window" is your best friend. As long as you clear the loan—either by paying it back in cash or by officially "voting" a dividend to cover it—within 9 months of your financial year-end, your company won't owe a penny in S455 tax.

Key Takeaway: S455 tax isn't a permanent cost, but it is a massive cash flow killer. Keeping your loan accounts tidy ensures your business's cash stays in your bank account, not HMRC’s.

Disclaimer: This post is intended for educational purposes and does not constitute formal tax or financial advice. For expert guidance regarding your Corporation Tax liabilities and director's loans, please contact the team at Excel Accountancy.