A close company is a UK resident company controlled by five or fewer participators, or by any number of participators who are directors. Most owner managed limited companies are close companies. The rule that matters most is the section 455 charge: if the company lends money to a shareholder and the loan is still outstanding nine months and one day after the year end, the company pays tax on it. For loans made on or after 6 April 2026 the rate is 35.75%.
What is a close company?
Under section 439 of the Corporation Tax Act 2010, a company is close if either of two conditions is met:
- it is under the control of five or fewer participators, or of participators (of any number) who are directors, or
- five or fewer participators, or participators who are directors, would be entitled to the greater part of the company’s assets if it were wound up.
A participator is broadly anyone with a share or interest in the company’s capital or income, including shareholders and loan creditors. The rights of a participator’s associates, such as close relatives, can be added to their own. Non UK resident companies, registered societies and building societies are never close.
Is my company a close company?
If you and up to four other people own the shares, or the directors between them control the company, almost certainly yes. The label costs nothing on its own. It matters because of the rules that follow.
What is a loan to a participator?
When a close company lends money to a participator or their associate, section 455 applies. This covers the familiar overdrawn director’s loan account, and also loans to trustees and to partnerships in which a participator is a partner. A debt the participator runs up with the company also counts. Section 455 does not apply to:
- loans made in the ordinary course of a money lending business
- normal trade credit for goods or services, unless it runs beyond six months or longer than customers usually get
- loans of up to £15,000 in total to a director or employee who works full time for the company and has no material interest in it
What is the section 455 tax rate?
The section 455 rate is the dividend upper rate for the tax year in which the loan is made. Finance Act 2026 raised that rate to 35.75% from 6 April 2026, and HMRC confirms the loan charge rises with it.
| Date the loan was made | Section 455 rate |
|---|---|
| 6 April 2022 to 5 April 2026 | 33.75% |
| On or after 6 April 2026 | 35.75% |
The date the loan was made fixes the rate, so a balance built up across both periods can carry two rates. The general gov.uk director’s loans guidance still quotes 33.75% at the time of writing.
When is section 455 tax due?
The tax is due on the day after the end of the nine month period following the end of the accounting period in which the loan was made. In practice that is nine months and one day after the year end, the same day as the company’s normal Corporation Tax payment deadline. Any loan outstanding at the year end must be shown on form CT600A with the Company Tax Return.
How do I avoid paying it?
If the loan is repaid, released or written off before the tax falls due, the company does not pay it. Many directors clear the balance with a bonus or a dividend. A dividend needs enough distributable profits and correct paperwork, so read our guide on how to pay dividends legally first.
Can I repay the loan and borrow it straight back?
No. Two anti avoidance rules, now in section 464ZA, stop this bed and breakfasting:
- The 30 day rule. If repayments of £5,000 or more are made and new loans of £5,000 or more are taken in a later accounting period within 30 days, the repayment is matched to the new loan instead of the old one.
- The arrangements rule. If you owe £15,000 or more and, when you repay, arrangements are already in place to redraw £5,000 or more, the repayment is again matched to the new borrowing.
Neither rule applies where the repayment is itself taxed as the participator’s income, such as a dividend credited to the loan account.
How do I reclaim section 455 tax?
Section 455 tax is refundable once the loan is repaid, released or written off. The catch is timing. If repayment happens more than nine months after the year end, relief is not due until nine months and one day after the end of the accounting period in which you repay. Interest charged on late section 455 tax is not refunded. Claim on form CT600A where relief is already due, or separately with HMRC form L2P.
What happens if the company writes the loan off?
The company gets its section 455 relief, but the participator pays Income Tax on the amount written off through Self Assessment, and the company must deduct Class 1 National Insurance through payroll.
Are other benefits to shareholders taxed as distributions?
Yes. Under section 1064, when a close company pays for accommodation, entertainment, services or other benefits for a participator, the cost is treated as a distribution, in the same way as a dividend. The amount is the cash equivalent of the benefit, less anything paid back. It does not apply where the benefit is already taxed as employment income, so it mainly affects shareholders who do not work for the company.
Section 464A also charges tax at the section 455 rate where value is passed to a participator through arrangements to avoid the loan charge. For payments made on or after 30 October 2024, returning that value brings no refund.
What is a close investment holding company?
A close company is a close investment holding company unless it exists wholly or mainly for permitted purposes. These include trading commercially, letting property commercially to unconnected people, and holding shares in trading group companies. A close investment holding company cannot use the small profits rate or marginal relief, so it pays the main rate of Corporation Tax however small its profits.
What else do directors ask about close companies?
Is section 455 tax a penalty?
No. It is a temporary tax, refunded once the loan is cleared, but a real cash cost in the meantime.
Do I need to pay interest on a director’s loan?
Not necessarily, but if a shareholder director owes more than £10,000 at any time in the year, the loan is a benefit in kind and tax may be due on interest below HMRC’s official rate.
Why does this matter if HMRC opens an enquiry?
Director’s loan accounts, CT600A entries and shareholder benefits are where small errors can prompt HMRC questions, and answering them means paying your accountant for the time. Solar Protect tax investigation insurance covers up to £100,000 of accountant’s fees with no excess. Get a quote in a few minutes.
Reviewed by Matthew Bartlett, Director, Solar Protect. Last reviewed 29 September 2026. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.