Writing off a director's loan clears the balance and releases the section 455 charge, which makes it look like the simple way out. It is usually the most expensive one. The write-off is taxed on the director as if it were a distribution, it carries national insurance in a way that surprises people, and the company gets no deduction for it.
What the director pays
A loan released or written off in favour of a participator is treated for income tax as a distribution and taxed on the director at dividend rates. That much is the same as clearing the loan with a dividend. What differs is national insurance: HMRC treats the write-off of a director's loan as earnings for Class 1 national insurance purposes, so both employee and employer contributions can arise on an amount that is being taxed as a dividend for income tax. Being taxed under two regimes at once is what makes this the expensive route.
What the company gets, which is nothing
The company gets no corporation tax deduction for writing off a loan to a participator. The amount left the company when it was lent and it does not become a deductible expense when it is forgiven. The company does recover its section 455 tax, because a release counts as the loan ceasing to exist for that purpose, but that recovery follows the same nine months and one day timetable as any other s455 reclaim.
When it is still the right answer
Where the director genuinely cannot repay and has no dividend capacity because the company has no distributable reserves, a write-off may be the only route that closes the position. It is also sometimes used deliberately where the national insurance cost is small relative to the administrative cost of carrying a loan account for years. What it should not be is the default: a company with reserves almost always does better declaring a dividend, and a director who can repay almost always does better repaying.
Questions people ask about write off directors loan account
Is a written-off director's loan taxable?
Yes. It is treated as a distribution and taxed on the director at dividend rates, and HMRC also treats it as earnings for Class 1 national insurance, so both employee and employer contributions can arise.
Can the company claim a deduction for writing off a director's loan?
No. There is no corporation tax deduction for releasing a loan to a participator. The company does recover the section 455 tax, on the usual timetable.
Is writing off cheaper than paying the s455 charge?
Rarely. The s455 charge is refundable and the write-off is not, and the write-off attracts national insurance on top of dividend-rate income tax. A dividend, where reserves allow, is usually the cheaper way to clear the balance permanently.