Director’s Loan Write-Off: Tax & NI Rules You Need to Know

Loans from a personal or family-owned company to its directors aren’t unusual — but when those loans are written off, the tax and National Insurance implications can catch people off guard.

HMRC has recently been paying closer attention to this area, even contacting individuals whose loans were released or written off between 6 April 2019 and 5 April 2023 but weren’t declared on their Self Assessment tax returns.

If this applies to you, here’s what you need to know — and how to handle the situation.

HMRC Disclosure Requirements

• Loans written off between 6 April 2019 and 5 April 2023:
  You must tell HMRC if you haven’t already declared the written-off amount as income. This can be done using HMRC’s online disclosure service (or via your accountant/agent).

• Loans written off after 5 April 2023:
  If it hasn’t been declared on your Self Assessment return, simply amend your return — no need to use the disclosure service.

Tax Consequences for the Company

When a company writes off a director’s loan, the tax outcome depends on whether section 455 tax was paid.

• If section 455 tax was paid:
  The write-off is treated like a repayment, meaning the company can reclaim the tax nine months and one day after the end of the accounting period in which the write-off occurred.
  The claim can be submitted online, and the loan write-off must also be reported on the company’s Corporation Tax return.

Tax Consequences for the Director

For the director, the written-off loan is treated as a distribution and taxed at dividend rates.

• This amount must be declared on your Self Assessment tax return.

• If you are both a director and an employee, employment income rules could apply — but the dividend tax treatment takes priority, so there’s no double charge.

National Insurance Considerations

This part is trickier.

• If the loan is linked to your employment:
  HMRC will usually assume it counts as earnings, meaning Class 1 National Insurance (both employer and employee contributions) will be due.

• If the loan comes from shareholders’ funds and isn’t related to your work:
  It might avoid National Insurance altogether — but HMRC can challenge this.
  For stronger support, the write-off should be approved at a general meeting or by a written shareholder resolution.

A Smarter Alternative to Writing Off the Loan

Instead of writing off the debt, consider paying the director a dividend (if the company has enough retained profits) and then using that dividend to repay the loan.

• The income tax position remains the same.

• National Insurance is avoided because dividends aren’t subject to NI.

Key takeaway: Writing off a director’s loan triggers both tax and National Insurance considerations. Getting professional advice before making a decision can save you unnecessary costs — and help you stay compliant with HMRC rules.

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