If you took money out of your own company as a loan and it was later written off or released, the director's loan written off tax usually falls on you personally. HMRC generally treats the amount as a distribution, taxed like a dividend, and the company may also owe National Insurance. HMRC is now writing to directors who had a loan written off but did not declare it, so it is worth understanding how the charge works before you reply.
What happens when a director's loan is written off?
A director's loan account records money you have drawn from the company beyond your salary, dividends and legitimate expenses. If some or all of that balance is written off or released, rather than repaid, HMRC does not simply ignore it. For a close company (broadly, one controlled by five or fewer participators or by its directors), the amount released is treated as a distribution in the hands of the participator. In plain terms, a loan you no longer have to pay back is treated much like income you have received.
How is the written-off loan taxed on you?
The amount written off is charged to Income Tax on you as a participator, at dividend rates, and you report it through your Self Assessment return. For 2026/27 the dividend rates are 10.75% at the basic rate, 35.75% at the higher rate and 39.35% at the additional rate (2026/27, from 6 April 2026), and the first £500 of dividend income is covered by the dividend allowance (2026/27). The gov.uk guidance on tax on dividends sets out the current rates and allowance.
There is a second charge that catches people out. Where the borrower is a director, HMRC also treats the write-off as earnings for National Insurance, so the company must deduct Class 1 National Insurance through its payroll. That means one write-off can trigger Income Tax on the individual and National Insurance on the company, on the same amount. The gov.uk directors' loans guidance confirms both points.
How does this interact with the section 455 charge the company paid?
If the loan was still outstanding nine months and one day after the end of the company's accounting period, the company will usually have paid a temporary Corporation Tax charge on it, known as the section 455 charge (33.75% of the loan on gov.uk's current guidance, or 32.5% for loans made before 6 April 2022). That charge is refundable once the loan is repaid, written off or released. So on a write-off the company can reclaim its section 455 tax, but you may then face the Income Tax charge described above, and the company the National Insurance. The section 455 tax and your personal Income Tax are separate charges on separate people, not one instead of the other.
Example. A director has £30,000 of loan written off in 2026/27 and is already a higher-rate taxpayer. The £500 dividend allowance covers part of it, leaving £29,500 taxed at the dividend higher rate of 35.75% (2026/27), an Income Tax bill of about £10,546. The company can reclaim the section 455 tax it paid earlier, but must also account for Class 1 National Insurance on the £30,000 through payroll. Actual figures depend on your other income and the company's position.
Why is HMRC sending nudge letters about this?
HMRC receives company accounts and can see where a director's loan balance has disappeared without being repaid. Where the corresponding income was not declared on a personal tax return, it sends a nudge letter inviting you to check and correct your position. The current campaign focuses on loans written off or released in earlier years that were not reported. A nudge letter is a prompt, not a formal assessment, but ignoring it can lead to a formal enquiry.
What should you do if you receive one?
Do not reply on autopilot. First check whether the write-off was genuinely taxable on you and whether it was already reported. If tax is due, the way to put it right depends on timing. For a recent year, you may be able to amend your Self Assessment return. For older years, HMRC's digital disclosure service is the usual route, and it can be used even where the loan was written off some years ago. If the letter is wrong, or the amount was not in fact a taxable distribution, you can explain why. Our guide on what to do if you receive an HMRC nudge letter walks through the steps, and our tax investigations team can review the letter and handle the response for you.
Frequently Asked Questions
For a close company, the amount released or written off is treated as a distribution and taxed on you at dividend rates through Self Assessment. For 2026/27 those rates are 10.75%, 35.75% and 39.35% depending on your band, with a £500 dividend allowance (2026/27).
Where the borrower is a director, HMRC treats the write-off as earnings for National Insurance, so the company deducts Class 1 National Insurance through payroll. The Income Tax charge on you and the National Insurance on the company can both apply to the same amount.
Yes. The section 455 Corporation Tax charge is refundable once the loan is repaid, written off or released. That does not remove your personal Income Tax charge on the write-off, as they are separate charges on the company and the individual.
If a recent return is still in time, you may be able to amend it. For older years, HMRC's digital disclosure service is the usual way to report and settle the tax. Getting the analysis right first matters, because not every write-off is a taxable distribution.
If you have had a director's loan written off, or a nudge letter has landed, we can check whether tax is really due and deal with HMRC for you. Call us on 020 8554 2135, email info@visionconsulting.co.uk, or use our contact page.
By the Vision Consulting team.
This is general information, not advice. Your position depends on your circumstances.