Loans to Participators and Budget Changes

Dividend tax rates for individuals are changing from 8.75% on dividends within the basic rate band, 33.75% on dividends within the higher income tax band and 37.35% on dividends within the additional income tax band to 10.75%, 35.75% and 39.35%, respectively. That’s a 2% increase across the board – except that the first £500 of dividend income continues to be taxed at 0%, as now.

The new rates apply, as you say, to dividends paid on or after 6 April 2026.

‘Section 455 tax’ can apply when a company makes a loan to a shareholder. For many small personal and family companies, where the shareholders are also directors, this is linked to the director’s current account (also called the director’s loan account, or DLA) with the company; if, for example, the company pays a personal expense of the director, this may be charged to the DLA, and if the DLA goes ‘overdrawn’, S455 tax may need to be considered.

Subject to anti-avoidance rules that we come to below, no S455 tax is due unless the loan is outstanding nine months after the company’s year-end. If the S455 tax does become due because the loan is outstanding (or the DLA is still overdrawn) at that nine-month date, it can be reclaimed later if the loan is repaid or the DLA cleared. This is often done by the company declaring a dividend that is put as a credit to the DLA.

The rate of S455 tax is matched to the higher rate of tax on dividends. As this increases to 35.75% on 6 April 2026, so too does the rate of S455 tax.

The rate that applies depends on the time that the loan is made. For loans made before 6 April 2026, the 33.75% rate continues to apply even if the loan remains outstanding after that date.

Example:

A company with one director and one shareholder has a year-end in December. As of 31 December 2025, the DLA is £12,000 overdrawn. The director withdraws a further £5,000 before 6 April 2026 and a further £15,000 between 6 April and 31 December 2026. The company pays dividends of £10,000 annually on 1 September. The dividends are paid into the DLA.

Year 1: The £12,000 overdrawn as of 31 December 2025 relates to drawings in that year. The dividend paid in September 2026 is treated as reducing the overdrawn amount to £2,000. The tax due on the normal due date for payment, 1 October 2026, would be increased to include S455 tax of £2,000 x 33.75%, or £675. The old rate applies because that’s when the loan was made.

Year 2: The rate applicable to the £5,000 drawn between 1 January and 5 April 2026 would be 33.75%; the rate applicable to the £15,000 drawn after 5 April would be 35.75%. It makes sense to allocate the £10,000 dividends in September 2026 against the later drawings and there is nothing in law to prevent this. The S455 tax due on 1 October 2027 is therefore: £5,000 x 33.75% plus £5,000 x 35.75%, a total of £3,475.

Year 3: If there were no further drawings in this year, then a further dividend of £10,000 would enable the company to reclaim the £3,475 tax paid for year 2. The £675 tax paid for year 1 would not be recoverable until the remaining £2,000 due to the DLA was repaid, cleared or waived.

The anti-avoidance rules we mentioned before are intended to stop companies from avoiding S455 tax charges by the director ‘bed and breakfasting’ a loan (repaying it for a short period then taking it back out) and/or by repaying a loan due to one company with a new loan from another. If they applied in our example, it could result in the September 2026 dividend having to be allocated against drawings in 2026, and that could increase the tax due on 1 October 2026. As the anti-avoidance provisions do not apply where the repayment is by way of a dividend being paid and allocated to the DLA, we were able to allocate the September 2026 dividend in the way we showed in our example.

For more information, please contact us at: consultancy@vantagefeeprotect.com

Dominic Tunks
Tax Advisor