Director’s Loans & Dividend Tax Changes – What’s Happening from April 2026?
From 6 April 2026, both the basic and higher rates of dividend tax will increase by 2%. As a result, the Section 455 tax charge on overdrawn director’s loan accounts (ODLAs) will also rise — increasing to 35.75% for loans made on or after 6 April 2026 (up from the current 33.75% rate).
The Section 455 rate is intentionally aligned with the higher dividend tax rate, meaning changes to dividend taxation have a direct impact on the cost of leaving a director’s loan overdrawn. With these increases on the horizon, now is an important time for directors and shareholders to review how they extract funds from their companies.
Why does this matter?
An overdrawn director’s loan account arises when a director withdraws more money from the company than they are entitled to by way of salary, dividends or expenses.
If not repaid within nine months of the company’s year-end, a Section 455 tax charge becomes payable by the company. While this tax can be reclaimed once the loan is repaid, it can create significant cashflow pressure in the meantime — and the cost of leaving loans outstanding is increasing from April 2026.
Added complexity in insolvency situations
Overdrawn director’s loan accounts can become particularly problematic where a company enters financial difficulty.
Importantly, liquidation or administration does not automatically clear an overdrawn loan. The balance remains a company asset, and a liquidator has a legal duty to pursue repayment for the benefit of creditors.
If the director cannot repay the outstanding amount, this may lead to court action or, in some cases, personal insolvency.
In practice, overdrawn loan accounts are a common feature in insolvency cases — often arising where funds were withdrawn during profitable periods but repayment becomes difficult when trading conditions deteriorate.
Salary vs dividends – is the balance shifting?
Historically, dividends have often been viewed as a more tax-efficient method of profit extraction compared to salary. However, with dividend tax rates increasing again from April 2026, the gap between salary and dividend taxation is narrowing.
While dividends still benefit from the absence of employer’s National Insurance, the overall position is becoming more nuanced. What is most tax-efficient will increasingly depend on individual circumstances — including profit levels, existing remuneration strategy, personal tax bands and long-term planning objectives.
A one-size-fits-all approach is no longer appropriate, and remuneration strategies should now be reviewed on a case-by-case basis.
Now is the time to review your position
With both dividend tax rates and the Section 455 charge increasing from April 2026, directors should consider:
- Whether existing loan balances can be cleared
- Whether their salary/dividend mix remains appropriate
- Whether future profit extraction strategies remain tax-efficient
- The potential risks if the business were to face financial pressure
Early professional advice can help identify the most appropriate course of action and avoid unintended tax and personal financial consequences.
If you would like to review your current position or discuss the upcoming changes, please contact the Langricks team for a confidential conversation.
