An unannounced tax rise
There is a corporation tax (CT) charge on loans made to ‘participators’ in close companies (broadly, companies controlled by 5 or fewer shareholders) where the loan is outstanding at the end of a CT accounting period (CTAP). This charge used to be at a fixed rate, which Chancellors changed from time to time. However, in 2016, George Osborne altered this principle, instead setting the rate to be equal to the tax rate that higher rate taxpayers pay on dividends.
Change in dividend tax rates
In the November 2025 Budget, Rachel Reeves announced that dividend tax rates for basic and higher rate taxpayers would both rise by two percentage points from 6 April 2026 to, respectively, 10.75% and 35.75%. Due to the increase in the latter, CT on loans advanced from 6 April 2026 is automatically increased to 35.75% (from 33.75%).
Clearing overdrawn loan accounts
The tax is payable nine months and one day from the end of the CTAP. However, to the extent the loan is repaid (typically by declaring a dividend) or written off by the company before the payment date, no tax will be payable. With the upcoming rate increase, if partial repayments of loans to director-shareholders are made, it will be very important to specify which loan or loans are being repaid.
Example
Lucy owns 100% of her company, which has a June year-end. At 30 June 2026, she has an overdrawn director’s loan account of £40,000, which has arisen as follows:
•loans from 1 July 2025 to 5 April 2026 of £22,000; these would attract a CT charge at 33.75%; and
•loans from 6 April to 30 June 2026 of £18,000; these would attract a CT charge at 35.75%.
The parties may choose which of the loans any repayment should be set against and should clearly document their intentions (e.g. by an email from Lucy to the company). If a partial repayment of £26,000 is made in March 2027, this should be allocated:
•firstly, against the post 5 April loans (£18,000); then
•against £8,000 of the rest of the loans.
This would leave £14,000 of the pre-6 April loans outstanding, producing a tax charge at 33.75% of £4,725, payable on 1 April 2027.
If no formal allocation is made by the director or the company, HMRC would normally allocate repayments against the oldest outstanding borrowing. Although this normally works in the taxpayer’s favour (by assuming, for example, that loans that were outstanding at the last year-end are paid off before more recent loans, which would not yet be triggering a tax charge), it would not be the case in our example.
For Lucy, if the earlier loans were deemed paid off first, it would mean that £14,000 of the post 5 April 2026 loans are left unpaid. This would suffer a tax charge at 35.75%, giving tax payable of £5,005.
Loans subsequently repaid or written off
Where this tax charge has been paid on outstanding loans, it will be reclaimable by the company if the loan is subsequently repaid by the shareholder or written off by the company. In the latter case, there will be income tax and (usually) National Insurance implications for the shareholder and the company.
Compliance
There are a number of tax traps involving directors’ loans. Make sure you are aware of all the income tax, National Insurance and corporation tax issues, as they often catch out the unwary. There is also a lot of anti-avoidance legislation to catch what HMRC believe to be artificial ways of repaying loans. We can help you make sure that your tax compliance in this area is accurate, so that you can avoid unexpected tax charges, interest and penalties. If you have further queries please do get in touch with the team.
