Key facts
- A close company is one controlled by 5 or fewer participators, or by participators who are also directors.
- The vast majority of UK private limited companies are close companies.
- Loans to participators attract a Section 455 tax charge of 35.75% (for loans made on or after 6 April 2026) if not repaid within 9 months of the year end.
- Benefits provided to participators may be taxed as distributions rather than employment benefits.
How Close Company Rules Affect Your Business
A company is “close” if it is controlled by:[1]
- Five or fewer participators, or
- Any number of participators who are also directors
A participator is anyone who has a share or interest in the company — shareholders, loan creditors, and anyone entitled to the company’s income or assets. This is broader than just shareholders; it can include people with options or rights over shares.
In practice, the vast majority of UK private limited companies are close companies. A typical owner-managed business with one or two director-shareholders is almost certainly close.[3]
Companies that are NOT close: Public companies whose shares are listed on a recognised stock exchange (and are widely held) are generally not close. Similarly, companies controlled by non-close companies are excluded.[1]
Loans to Participators (Section 455)
The most significant consequence of being a close company concerns loans to participators. If a close company makes a loan (or advances money) to a participator or their associate, and the loan is still outstanding 9 months and 1 day after the end of the accounting period, the company must pay a Section 455 tax charge.[2] The charge is declared on supplementary page CT600A, filed alongside the company’s CT600 return.
| Aspect | Detail |
|---|---|
| Tax rate | 35.75% of the outstanding loan amount (equal to the upper dividend tax rate from 6 April 2026; 33.75% for earlier loans) |
| When payable | 9 months and 1 day after the end of the accounting period in which the loan was made |
| Repayment of S455 tax | HMRC refunds the S455 tax 9 months after the end of the accounting period in which the loan is repaid |
| Write-off | If the loan is written off, it is treated as a distribution to the participator (taxed as dividend income) |
Practical example: A director borrows £30,000 from their company (year end 31 March 2027). If the loan is not repaid by 1 January 2028, the company must pay S455 tax of £10,725 (35.75% × £30,000). The company gets this back if the director eventually repays the loan.[2]
Benefits Provided to Participators
When a close company provides a benefit to a participator (or their associate) that would not otherwise be taxable as employment income, it may be treated as a distribution. This means the participator is taxed at dividend rates on the value of the benefit.[4]
Common examples include:
- Providing a company asset (such as a property or boat) for the personal use of a shareholder
- Paying personal expenses of a participator that are not genuine business costs
- Excessive remuneration to a family member who does not perform commensurate duties
Where the participator is also a director or employee, the benefit may instead be taxed under the normal benefits-in-kind rules (reported on form P11D). The close company rules only catch benefits that fall outside the employment income rules.
Close Companies and Associated Companies
The close company rules interact with the associated companies rules that determine the small profits rate thresholds. If a single individual controls multiple close companies, those companies are associated, and the £50,000 / £250,000 thresholds for the small profits rate are divided among them.[3]
This prevents a business owner from incorporating several companies purely to multiply the benefit of the small profits rate.
Avoiding Common Pitfalls
If you run a close company, be aware of these common traps:
- Overdrawn director’s loan account — regularly monitor the balance to avoid an unexpected S455 charge
- “Bed and breakfasting” loans — repaying a loan shortly before the year end and re-borrowing afterwards is caught by anti-avoidance rules if the new loan exceeds £5,000
- Loans to associates — loans to a director’s spouse, child, or family trust also fall within Section 455
- Write-offs — writing off a director’s loan creates an Income Tax charge on the director as well as potentially triggering National Insurance
Frequently Asked Questions
What is a close company?
A close company is one controlled by 5 or fewer participators, or by any number of participators who are also directors. The vast majority of UK private limited companies are close companies.
What is Section 455 tax on director loans?
If a close company lends money to a participator and the loan is not repaid within 9 months and 1 day after the accounting period end, the company must pay a Section 455 tax charge of 35.75% of the outstanding amount (for loans made on or after 6 April 2026; loans made earlier are charged at 33.75%).
Can I get Section 455 tax back if the loan is repaid?
Yes. HMRC refunds the Section 455 tax 9 months after the end of the accounting period in which the director repays the loan. However, the company has no use of those funds in the meantime.
What happens if a director’s loan is written off?
If the loan is written off, it is treated as a distribution to the participator and taxed as dividend income. This also creates an Income Tax charge on the director and may trigger National Insurance.
Further Reading
- Who Pays Corporation Tax? — the types of entities liable for CT
- Corporation Tax Rates — how the small profits rate and thresholds work
- What Is Corporation Tax? — an overview of the tax
- Setting Up a Company & Tax — what new company owners need to know
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