Director’s Loan Write-Off: Tax, s455 Relief & NIC
A director’s loan write off can remove all or part of an overdrawn director’s loan from the company’s balance sheet, but it can also create a personal tax charge for the director or shareholder.
Where a close-company loan is released or written off, the company may be entitled to section 458 relief from the associated s455 Corporation Tax, while the amount forgiven can become taxable income of the borrower.
What Does It Mean to Write Off a Director’s Loan?
A write-off means that the company formally decides that the borrower no longer has to repay all or part of the debt.
HMRC also uses the term “release” for this type of transaction. In substance, the company gives up its right to collect the amount owed.
This is very different from the director actually repaying the loan in cash or clearing it through a valid dividend or other genuine credit.
A Write-Off Is Not the Same as Repaying the Loan
Director Pays the Company
The borrower genuinely returns money or otherwise satisfies the debt.
Company Forgives the Debt
The borrower receives an economic benefit because the obligation to repay is removed.
What Happens to the Company’s s455 Corporation Tax?
HMRC confirms that where a loan which was within section 455 is subsequently released or written off, the company can obtain relief under section 458 CTA 2010.
This can apply to a full write-off or to a partial write-off.
The corresponding section 455 tax can therefore be repaid or discharged, subject to the normal relief and claim rules.
Read Reclaiming s455 Corporation Tax →HMRC states that where a qualifying close-company loan is released or written off, the amount forgiven is generally included in the borrower’s total income under ITTOIA 2005 section 415.
Does the Director Pay Income Tax on a Written-Off Loan?
Yes, potentially. Where section 415 applies, the amount released or written off is treated as income of the borrower.
The tax charge arises because the director or shareholder has received the benefit of no longer having to repay the debt.
The personal tax position therefore needs to be considered alongside the company’s section 458 relief.
Company Relief and Personal Tax Can Arise at the Same Time
This is a simplified illustration. The actual liability depends on the borrower’s status, the nature of the loan, employment relationship, timing and other facts.
Can Class 1 National Insurance Apply to a Director’s Loan Write-Off?
HMRC states that where the borrower is an employee and the amount released or written off represents remuneration or profit derived from the employment, Class 1 National Insurance can arise.
HMRC’s manuals distinguish this from the ordinary beneficial-loan Class 1A NIC rules that can apply while a loan remains outstanding.
A write-off therefore needs its own payroll and NIC review rather than being treated simply as the end of a beneficial loan.
Can Only Part of a Director’s Loan Be Written Off?
Yes. HMRC’s rules apply where a loan or advance is wholly or partly released or written off.
The forgiven portion can create section 458 relief for the company and a corresponding personal tax charge for the borrower.
The remaining balance continues to exist and must still be dealt with separately.
The Write-Off Must Reflect a Genuine Decision
A director’s loan should not simply be removed from the ledger because the balance is inconvenient.
Confirm the Debt
Reconcile the DLA before any write-off is considered.
Approve the Release
Document the company’s decision appropriately.
Post the Accounting Entry
Record the release in the company’s books.
Review Corporation Tax
Consider section 458 relief and CT600A implications.
Review Personal Tax
Determine the borrower’s section 415 tax treatment.
Review NIC
Consider whether Class 1 NIC applies.
An accounting entry should reflect a genuine transaction or legal event. Posting a credit to eliminate the balance without determining what actually happened can produce incorrect accounts and tax returns.
The Reason for Clearing the Loan Determines the Tax Treatment
A cash repayment, dividend credit, salary or bonus, expense reimbursement and loan write-off are not interchangeable.
Each transaction can have different Corporation Tax, Income Tax, PAYE, National Insurance and company-law consequences.
The DLA should therefore be corrected according to what actually occurred rather than simply choosing a convenient journal.
What Happens If a Loan Is Written Off During Liquidation?
HMRC states that once liquidation begins, a liquidator can seek repayment of outstanding loans or, where appropriate, release or write off an outstanding balance.
Where the loan is released or written off, section 458 relief can become due to the company and any corresponding section 455 tax can be repaid or discharged.
The borrower can still face the section 415 Income Tax charge and Class 1 NIC can also arise.
Read Director’s Loan on Liquidation →A Reduced Settlement Can Include a Partial Write-Off
Where the company or liquidator accepts less than the full amount in full and final settlement, the unpaid balance may be treated as released or written off.
The amount paid is a genuine repayment. The amount forgiven requires separate section 458, section 415 and NIC consideration.
How Does a Loan Write-Off Affect CT600A?
Where the original loan was reported under the close-company loan rules, the later release or write-off can affect the section 455 and section 458 position reported through the Company Tax Return.
Depending on timing, relief may be reflected through CT600A, an amended return or a separate claim procedure.
Historic CT600A filings should therefore be reviewed before the write-off relief is claimed.
Read CT600A Explained →HMRC’s employment guidance states that the tax charge on a released or written-off employment-related loan arises for the year in which the release or write-off occurs.
The Write-Off Date Can Determine the Personal Tax Year
The company should document when the debt was actually released or written off rather than relying solely on when an accounting journal was entered.
This can affect the tax year in which the borrower needs to report the taxable amount.
Not Every Loan Write-Off Is Treated Identically
Specialist exceptions exist and should be checked where relevant.
Loan Written Off After Death
HMRC’s employment rules provide an exception from the employment loan write-off charge where the loan is waived or written off on or after the death of the director or employee.
Loan to a Relative
Specific rules can apply where the loan was made to a relative and the director or employee derived no personal benefit.
Facts Still Matter
Different statutory charging provisions can interact, particularly where the borrower is both a shareholder and an employee.
What Should Be Reviewed Before Writing Off a Director’s Loan?
Mistakes With Director’s Loan Write-Offs
Related Director’s Loan Guides
Director’s Loan Write-Offs Connect With Tax, Payroll & Accounts
A write-off should be reflected consistently across the company’s accounts, Corporation Tax return, payroll and the director’s personal tax position.
Director’s Loan Write-Off Resources
Director’s Loan Write Off FAQs
Can a company write off a director’s loan?
A company can release or write off all or part of a debt where this is properly authorised and reflects a genuine legal and accounting event.
Does the company get s455 relief?
HMRC confirms that section 458 relief can be available when a loan within section 455 is subsequently released or written off.
Does the director pay tax on the write-off?
Where ITTOIA 2005 section 415 applies, the amount released or written off is generally included in the borrower’s total income.
Is National Insurance due on a director’s loan write-off?
Class 1 NIC can arise where the borrower is an employee and the amount released or written off represents remuneration or profit derived from employment.
Can only part of the loan be written off?
Yes. HMRC’s rules apply to loans that are wholly or partly released or written off.
Can I simply post a journal to clear the DLA?
No. The accounting entry should reflect a genuine underlying event, such as repayment, dividend, remuneration, expense reimbursement or formal release of the debt.
What happens if the write-off takes place in liquidation?
Section 458 relief can become available to the company, but the borrower can still face Income Tax and potentially Class 1 NIC.
What if the liquidator accepts a lower amount in full settlement?
The unpaid balance may amount to a partial release or write-off and should be reviewed separately for company relief and borrower tax.
Which tax year is the write-off taxed in?
The relevant tax charge is generally considered by reference to the year in which the loan is actually released or written off.
Check the Company and Personal Tax Consequences First
Tell us the director’s loan balance, whether s455 has already been paid, the amount proposed to be written off and whether the director is also an employee and shareholder.
Tell Us About the Loan and Proposed Write-Off
The amount, timing and status of the borrower are important when determining the Corporation Tax, personal tax and NIC position.