TAX UPDATE — LIMITED COMPANIES
HMRC is doubling late filing penalties for corporation tax returns and raising the tax charge on directors’ loans from April 2026. Here is what every limited company contractor, freelancer and consultant should be aware of.
Late filing penalties: the cost is about to double
If you run your business through a limited company, you are required to submit a corporation tax return to HMRC each year, typically within 12 months of your company’s accounting year-end. Filing it even a day late has always triggered a financial penalty, but from 1 April 2026, those penalties are being doubled.
HMRC says it last updated these penalties in 1998. Because they have not kept pace with inflation, the regulator argues they have lost their power to deter poor compliance. The increases are described as restoring the penalties to their original real-terms value, according to an ICAEW Insights report.
The new penalty structure, effective for returns with a filing date on or after 1 April 2026, is as follows:
| Scenario | From 1 April 2026 | Before 1 April 2026 |
| Return filed late | £200 | £100 |
| Return filed more than 3 months late | £400 | £200 |
| Late filing: three successive failures | £1,000 | £500 |
| More than 3 months late: three successive failures | £2,000 | £1,000 |
If you are already diligent about filing on time, nothing changes in practice. But if late filing has ever crept up on you, perhaps during a busy contract or a change of accountant, the financial consequences from April 2026 will be significantly more painful.
Directors’ loans: the tax charge is going up
This change is specifically relevant to contractors who occasionally take money out of their limited company in a way that is not formally a salary or dividends. In plain terms: yes, this is about directors’ loans.
What is a director’s loan?
When you draw money from your company that is not categorised as salary, dividends, or a reimbursement of expenses, it is classed as a loan from the company to you. This is recorded in your company’s director’s loan account. You are expected to repay it — or reclassify it as a dividend or salary — typically within nine months of the end of your company’s accounting year.
What happens if you do not repay it in time?
If the loan is still outstanding when your nine-month deadline passes, your limited company faces a tax charge — known as a Section 455 tax — on the outstanding amount. This is a temporary tax: the company can reclaim it once you repay the loan. But it is real money that must be paid to HMRC in the meantime and can create a significant cash flow problem for smaller companies.
The rate is changing
At present, the Section 455 charge is levied at 33.75% of the outstanding loan balance. With effect from 6 April 2026, this rate will rise to 35.75% — an increase of two percentage points.
This rate is set in line with the income tax dividend upper rate, which is also increasing. The logic is that a director’s loan is essentially an undeclared dividend in disguise, so the tax treatment mirrors what you would have paid had you taken the money properly as a dividend.
Here’s an example:
Say you draw £20,000 from your company in October 2026 and do not repay it or declare it as a dividend before the nine-month repayment deadline. Under the new rate, your company would face a Section 455 tax bill of £7,150 (35.75% of £20,000), compared with £6,750 under the current 33.75% rate. The company can reclaim this tax once you repay the loan, but it must be paid upfront.
The main and small profits rates of corporation tax are not changing. These are remaining at 25% and 19% respectively, so this targeted adjustment to the director’s loan charge is the only rate change for companies to plan around.
What should contractors do now?
On filing deadlines, the simplest protection is to ensure your accountant has your company’s accounts and records in good time — and to build diary reminders well ahead of your filing deadline. A single late return now triggers £200; let it become a habit and the penalty reaches £2,000.
On director’s loans, review your loan account regularly — ideally at each quarter-end. If your account is in debit (meaning the company has loaned money to you), assess whether you can repay it or whether it should be formally declared as a dividend before your nine-month window closes. Discuss with your accountant whether loans made on or after 6 April 2026 are captured by the new 35.75% rate.
DISLAIMER
This article is for general information purposes only and does not constitute tax or legal advice. Consult a qualified accountant or tax adviser regarding your specific circumstances.
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