Writing Off a Director's Loan: Who Pays Tax and How Much?

The company formally gives up its right to be repaid, usually by board decision and a deed of release. HMRC also treats a payment accepted in "full and final settlement" as releasing the rest, and may argue that a loan nobody is collecting has been written off (CTM61560).

Section 415 of the Income Tax (Trading and Other Income) Act 2005 charges income tax where a close company releases a loan to a participator, and section 19 of the Income Tax Act 2007 classes that income as dividend income. For 2026/27 that means 10.75% at basic rate, 35.75% at higher rate and 39.35% at additional rate. You report it on your Self Assessment return (GOV.UK).

Where the participator is also an employee, the income is not taxed a second time as employment income (CTM61655).

Yes, in HMRC's view. CTM61660 and NIM12020 treat the amount as earnings for Class 1 NIC, a position upheld in Stewart Fraser Ltd v HMRC. For 2026/27 that is employer NIC at 15% above the £5,000 secondary threshold, plus employee NIC at 8% or 2%, deducted through payroll.

No deduction is allowed for the write-off itself under section 321A of the Corporation Tax Act 2009. But if the company paid section 455 tax on the loan (35.75% for loans made from 6 April 2026, per CTM61505), it can reclaim it from nine months and one day after the end of the accounting period in which the release happens.

Take a higher-rate director, dividend allowance already used, who owes £20,000 borrowed in 2026/27:

• Dividend-rate income tax at 35.75%: £7,150.
• Employer Class 1 NIC at 15%: £3,000.
• Employee Class 1 NIC: £400 at 2% if already above the upper earnings limit, or more at 8%.

If the company has enough distributable reserves, declaring a £20,000 dividend and setting it against the loan gives the same £7,150 of dividend tax without the National Insurance. So a write-off is rarely the cheapest route while the company is solvent. See our director's loan account guide and s455 guide.

A liquidator who releases the balance triggers the same charges. Our guide to closing a limited company with debts covers that situation.

Our director's loan account review compares repaying, a dividend, a bonus and a write-off before anything is signed. Monthly packages start from £45.83 + VAT, and the exact fee for this work is confirmed in writing first. You can book a free intro call about our services; tax advice on your own loan is a paid consultation.