Writing Off a Director's Loan: What It Really Costs in 2026/27

The tempting shortcut

The company is owed £20,000 by its director, the money is long spent, and someone suggests simply waiving it. A write-off (formally a release) does make the s455 position go away — but it swaps one tax bill for two others, and for most owner-directors it is the most expensive exit from an overdrawn loan account.

What the director pays

For income tax, a loan written off or released to a participator is treated like a distribution — taxed at dividend rates. For 2026/27 that means 10.75% in the basic band, 35.75% in the higher band and 39.35% in the additional band, after the £500 dividend allowance. On a £20,000 write-off, a higher-rate director faces income tax of roughly £7,150.

What the company pays

Because the amount written off is generally treated as earnings for National Insurance, Class 1 NIC is due through payroll — including employer NI at 15% (£3,000 on a £20,000 write-off), plus employee NIC. And unlike salary, the write-off of a participator's loan gets no corporation tax deduction: the company bears the cost with no relief.

The one piece of good news

Any s455 already paid on the written-off amount comes back. A release is treated like a repayment for s455 purposes, so relief falls due 9 months and 1 day after the end of the accounting period in which the write-off happens — claimed the same way as any s455 refund.

Write-off vs the alternatives (£20,000, higher-rate director, 2026/27)

Route	Director pays	Company pays	Notes
Write-off	~£7,150 income tax	£3,000 employer NI, no CT relief	s455 refunded if already paid
Dividend to clear loan	~£7,150 dividend tax	Nothing extra	Needs distributable reserves; not caught by the 30-day rule
Bonus to clear loan	Income tax + employee NI	Employer NI 15%, but CT-deductible	Payroll route
Repay and keep repaid	Nothing	Nothing (s455 refunded)	The cheapest — if the cash exists

The dividend route usually wins where reserves allow: same income tax as a write-off, but no employer NI. The write-off is really only rational where the company cannot be repaid and has no reserves to declare a dividend from.

Before you sign the waiver

• Check distributable reserves first — a dividend may achieve the same clean-up more cheaply.
• Put the release in writing (deed) and minute it; an informal "we'll forget about it" leaves the s455 position unresolved.
• Remember the liquidation trap: an overdrawn loan account is an asset of the company — in an insolvency the liquidator will pursue it, write-off or not.

Model the full cost of each route — write-off, dividend, repayment — in the free Director's Loan Tax Calculator.

This article is general guidance, not tax advice. NIC treatment on write-offs depends on the director's circumstances — confirm with your accountant before releasing a loan.