What Is A Close Company And How Does It Work?

The majority of UK-based private limited companies are small businesses. They employ relatively few people and operate with a simple organisational structure. The term "close company" describes most of these organisations, and indeed most of the private limited companies in the country fall within this classification.

Definitions Of A Close Company

In order to be classed as a close company, an organisation must fulfil certain criteria. In the first instance, the controlling parties in the company (which may be individuals, other corporations, or a combination of the two) must number no more than five. The controlling parties are referred to as participators, and a participator is generally any person with a share or interest in the capital or income of the company, most commonly through shareholding.

Alternatively, a company can be close if all of its participators, regardless of their number, are also directors of the business. Finally, it may also be close if five or fewer participators would be entitled to the majority of the assets were the organisation to be wound up, or if any number of participator-directors would be entitled to the same.

There are certain circumstances in which a company cannot be described as close, even if it satisfies the criteria above. Primarily, a company is not close if it is based outside the UK, or if it is controlled by a non-UK resident company that would not itself be classified as close were it based in the UK. Similarly, if one of the five controlling participators is a non-close company, the organisation in question cannot be described as close either.

There are also a number of circumstances in which quoted companies may not be counted as close. This is the case if 35% or more of the voting power is held by the public, and if the shares that convey those votes have been traded on a recognised stock exchange within the previous twelve months. The exception to the latter of these circumstances is that, if the principal participators between them hold total voting rights exceeding 85%, the company will still be classed as close regardless of its listed status.

Participator Loans And Close Companies

One of the key tax concerns for close companies revolves around loans given to participators or to the associates of participators. The term "associate" can mean a relative or business partner of a participator, and can also include certain trustees connected with that participator. It is the company's responsibility to account properly for any tax consequences through its Corporation Tax return, with the relevant rules set out in section 455 of the Corporation Tax Act 2010.

The term "loan" is defined broadly, and also covers advances on wages, overdrawn director's loan accounts, and various other arrangements through which company funds effectively pass into the hands of a participator. Generally, a close company may be required to pay a section 455 tax charge equal to 33.75% of the portion of the loan still outstanding at the end of the relevant accounting period, and this charge sits alongside the company's ordinary Corporation Tax liability rather than replacing any part of it.

If the loan is repaid, released, or written off within nine months and one day of the end of that accounting period, the charge will generally not arise at all. If it is settled after that date, the tax is usually reclaimable, but only after the relevant waiting period has passed, meaning that cash can be tied up with HMRC for a considerable length of time. For this reason, close companies are well advised to keep a careful eye on director's loan account balances as each accounting period draws to a close.

Finally, it is important to note that close company status does not by itself determine the rate of Corporation Tax payable. Since 1 April 2023, the applicable rate depends on the company's profit level and circumstances, with the small profits rate, the main rate, and marginal relief all potentially in play. A close investment holding company, however, is generally not entitled to the small profits rate and instead pays Corporation Tax at the main rate on all of its profits. In order to fall into this category, the company's activities must consist wholly or mainly of holding investments, rather than trading or investing in land which is then let on a commercial basis. Further details on the current rates and thresholds can be found in our guide to Self Assessment and related tax matters.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our Income Tax Calculator lets you enter your salary and get a clear breakdown of your income tax, National Insurance, and take-home pay for the 2025/26 tax year. See exactly where your money goes. Try it now →