When a close company releases or writes off a loan that was within section 455, the borrower is taxed on the amount written off under section 415 of the Income Tax (Trading and Other Income) Act 2005, as dividend income at dividend rates. If the borrower is a director or employee, HMRC also expects Class 1 National Insurance through payroll on the amount written off. The company recovers its section 455 tax, but gets no corporation tax deduction for the write off.

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How is the borrower taxed when the loan is written off?

Section 415 ITTOIA 2005 charges income tax where a company is or was chargeable under section 455 on a loan and then releases or writes off all or part of the debt. Section 416 taxes the amount released or written off in the tax year, and treats it as income for working out the borrower’s total income. Section 19 of the Income Tax Act 2007 classes income charged under this Chapter as dividend income.

The practical result is that the written off amount is taxed like a dividend. For 2026 to 2027 the dividend rates in section 8 of the Income Tax Act 2007 are 10.75% ordinary, 35.75% upper and 39.35% additional, and section 13A taxes the first £500 of dividend income at the dividend nil rate of 0%. Up to 2015 to 2016 the amount was grossed up and treated as received net of tax; HMRC’s manual at EIM21746 confirms that grossing up was removed from 2016 to 2017. See dividend allowance and tax rates.

The charge applies even if the company has stopped being close by the time of the write off, provided it was close when the loan was made (CTM61655). It is reported on the borrower’s Self Assessment return; gov.uk confirms that income tax on a written off loan is paid through Self Assessment.

Who is taxed if the borrower is not the obvious person?

  • Partnerships. For a loan to a partnership, section 417 charges each individual partner, with the amount apportioned on a just and reasonable basis. HMRC’s example at CTM61655 splits a £100,000 write off equally between three individual partners where one partner is a company.
  • Death. If the borrower has died and the debt is due from the personal representatives in that capacity, section 419 removes the section 415 charge and instead treats the amount as income of the estate. Otherwise the person owing the debt at the time of the write off is charged.
  • Ended trusts. Where the loan was to trustees and the trust has ended, section 420 charges whoever owes the debt when it is written off.

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Is it employment income instead?

Section 188 of the Income Tax (Earnings and Pensions) Act 2003 normally taxes a written off employee loan as earnings. Section 189 switches that off where the same amount is already taxed as income under another provision. HMRC’s guidance at EIM21746 states that where both section 415 and section 188 could apply, section 415 takes priority, so the amount is not taxed twice and is not subject to PAYE income tax.

The answer is different where the “write off” is really a payment. HMRC’s manual at CTM61655 says that a loan waived in place of remuneration or a dividend is in substance a repayment by set off, taxed as remuneration or as a dividend as the case may be. Labelling a bonus as a release does not turn earnings into dividend income.

What about National Insurance?

This is where most errors arise. HMRC’s view at CTM61660 is that where the participator is an employee, including a director, the amount released or written off is earnings for Class 1 National Insurance under section 3(1) of the Social Security Contributions and Benefits Act 1992. HMRC cites the First tier Tribunal decision in Stewart Fraser Ltd v HMRC [2011] UKFTT 46 (TC). The National Insurance Manual at NIM02210 adds that the amount written off becomes earnings at the time of write off, unless the employee gave something in return, such as an asset, to settle the debt.

The gov.uk guidance on loans to employees says that for any loan written off the employer must report it on form P11D and deduct and pay Class 1 National Insurance, but not PAYE tax. In practice that means running the amount through payroll for employee and employer Class 1 contributions while the income tax is collected through Self Assessment. For directors’ contribution rules see directors’ National Insurance.

A shareholder who is not an employee, such as a non working spouse, has no Class 1 liability on the write off, because there are no earnings from an employment.

What happens to the company’s section 455 tax?

Section 458 gives the company relief from the section 455 tax when the debt is released or written off, just as it does for a repayment. If the write off happens within nine months of the end of the accounting period in which the loan was made, the tax need never be paid. If it happens later, relief is not given until nine months after the end of the accounting period in which the write off occurs, and the claim must be made within four years from the end of the financial year of the write off. The mechanics, including forms CT600A and L2P, are covered in reclaiming section 455 tax.

Can the company deduct the amount written off?

No. Section 321A of the Corporation Tax Act 2009 prevents any loan relationship debit for the release or writing off of a loan that gave rise to a section 455 charge. HMRC’s manual at CTM61655 notes this applies to releases on or after 24 March 2010. The company therefore loses the money and gets no deduction, while the participator pays tax at dividend rates. Before writing a loan off it is worth comparing the overall cost with clearing it through salary or dividends; see salary versus dividends.

What counts as a release or write off?

HMRC looks at substance. In liquidations, CTM61560 says a settlement with the liquidator expressed to be in “full and final settlement” of the amount owed is a release of the balance. Where a company or liquidator has clearly given up pursuing the loan, HMRC may argue that it has been written off even without a formal decision. In a solvent liquidation the loan may instead be set off against the shareholder’s capital distribution, which is a repayment, not a write off. See overdrawn director’s loan account in liquidation.

Company law questions about loans to directors are covered in loans to directors and member approval.

How does it work in practice?

Illustration only. A director shareholder owes her company £40,000, borrowed in 2025 to 2026, and the company paid £13,500 of section 455 tax (33.75%). In 2026 to 2027 the board writes the loan off. Her other income uses up her personal allowance and basic rate band, and her total income stays within the higher rate band.

  • Income tax: the £40,000 is dividend income. If her dividend allowance is unused, £500 is taxed at 0% and £39,500 at 35.75%, giving £14,121.25 through Self Assessment.
  • National Insurance: as she is a director, Class 1 contributions are due through payroll on the £40,000 at the rates that apply to her.
  • Company: the £13,500 section 455 tax is relieved under section 458, but no deduction is allowed for the £40,000.

What mistakes should be avoided?

  • Putting the write off through payroll as taxable pay with PAYE income tax. Section 415 takes priority, so income tax belongs on the Self Assessment return.
  • Forgetting Class 1 National Insurance for director or employee borrowers.
  • Claiming a corporation tax deduction for the amount written off.
  • Assuming a non working family member escapes tax. The charge falls on the person to whom the loan was made.
  • Leaving a loan uncollected and assuming nothing happens. HMRC may treat it as written off.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.