Writing off an overdrawn director's loan clears the balance, but it does not make the tax disappear. It turns the loan into income for the director and, in HMRC's view, into earnings for National Insurance. Here is what it costs for 2026/27 and when a dividend is the cheaper way to clear it.
Written by James Whitfield · Last checked 18 October 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
When a company writes off a loan to a director who is also a shareholder, the amount written off is taxed on the director as dividend income, at 10.75%, 35.75% or 39.35% for 2026/27. HMRC's view, upheld at tribunal, is that Class 1 National Insurance is also due through payroll if the borrower is an employee or director: 8% or 2% for the director and 15% for the company.
The company gets no corporation tax deduction for the write-off, but it can reclaim any s455 tax it paid on the loan. Because of the National Insurance, clearing the loan with a declared dividend is usually cheaper when the company has the profits to pay one.
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The company formally releases the director from the debt, usually by deed. From that moment the director has received value from the company that will never be repaid. Tax law treats that value as a distribution for a shareholder: it is taxed as if it were a dividend in the tax year of the write-off.1
Unlike a real dividend, a write-off does not have to be paid to every shareholder in proportion and does not need distributable reserves. That flexibility is why it is used, and why HMRC adds the National Insurance charge.
Income tax is charged at the dividend rates for 2026/27: 10.75% in the basic-rate band, 35.75% in the higher-rate band and 39.35% above £125,140, after the £500 dividend allowance.2
HMRC's position is that a written-off loan to an employee or director counts as earnings for Class 1 National Insurance, collected through payroll in the pay period of the write-off. The First-tier Tribunal agreed in Stewart Fraser Ltd v HMRC. For a director paid £12,570, employee NI is 8% up to £50,270 of total earnings and 2% above, and employer NI is 15%.3
Alex is the only director and shareholder, paid a £12,570 salary with no other income. The company writes off Alex's £20,000 overdrawn loan in 2026/27. The company had paid £7,150 of s455 (35.75%) on it.
| Dividend tax: £500 at 0% + £19,500 at 10.75% | £2,096.25 |
| Employee Class 1 NI: 8% of £20,000 | £1,600.00 |
| Employer Class 1 NI: 15% of £20,000 | £3,000.00 |
| s455 the company can reclaimDue 9 months and 1 day after the end of the accounting period of the write-off | −£7,150.00 |
| Tax and NI on the write-off | £6,696.25 |
If the company instead declares a £20,000 dividend and credits it to the loan account, Alex pays the same £2,096.25 of dividend tax and no National Insurance: £4,600 cheaper. The company still gets the s455 back once the loan is cleared. A dividend needs enough retained profit and goes to all shareholders of that class in proportion, which is why write-offs are mostly used where one of those conditions fails.
1. Check the alternatives first: a dividend, a bonus through payroll, or repayment from personal funds.
2. Record the release formally. A deed of release is the safest route; a board minute recording the decision supports it.
3. Put the amount through payroll in the month of the write-off so Class 1 NI is reported on the FPS, without deducting PAYE income tax (the income tax is dealt with through Self Assessment as dividend income).
4. The director reports the written-off amount on their Self Assessment return for the tax year of the release, in the dividends section.
5. The company claims its s455 refund through its Company Tax Return or form L2P once the relief date has passed.4
A liquidator will try to collect an overdrawn director's loan for the creditors. If the company is solvent and being wound up, an overdrawn balance can be treated as a distribution in specie to the shareholder, but get advice before relying on that. Striking a company off with a loan still outstanding does not cancel the tax: HMRC can still treat the balance as released.
As dividend income for a director who is a shareholder: 10.75%, 35.75% or 39.35% in 2026/27 after the £500 dividend allowance. HMRC also expects Class 1 National Insurance through payroll.
HMRC's view is yes: the amount counts as earnings for Class 1 NI if the borrower is an employee or director, and the tribunal agreed in Stewart Fraser Ltd v HMRC. Employee NI is 8% (2% above £50,270) and employer NI 15%.
No. The company cannot deduct the amount written off, but it can reclaim any s455 tax it paid on the loan.
Relief is due 9 months and 1 day after the end of the accounting period in which the loan was written off. Claim it in the Company Tax Return or on form L2P.
A dividend is usually cheaper because it has no National Insurance. On £20,000 a dividend saves £4,600 of NI for a basic-rate director. It needs enough retained profit and has to go to all shareholders of the class.
The rates and rules on this page are drawn from the official UK government sources below, using the confirmed 2026/27 figures. Each link opens the relevant HMRC, GOV.UK or Companies House page in a new tab.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.