Taking a director’s loan from a business isn’t unusual. But if you do, you must repay it within a set time or face paying S455 (Section 455) tax.
HMRC earlier this year wrote to company directors who held a loan that was released or written off between 2019-2023 and hadn’t disclosed it as part of a crackdown. Understanding the implications of the S455 tax is essential because getting it wrong could lead to an unexpected bill.
Of course, using an accountant with experience is essential. But it’s always a good idea to get to grips with how things work so you always give your accountant the right information.
If you are a director of a limited company, the cash belongs to the business, not you. That means you can’t just take funds. Instead, you must be paid by salary or dividends. And should there be an occasion where you need a little extra, you then take a director’s loan.
We’ve looked already at what constitutes a director’s loan and how they work. You can check that out here. So, let’s look at what the Section 455 loan is and how it might affect you.
What is S455 tax?
Section 455 (S455) of the Corporation Tax Act 2010 applies to director’s loans that are unpaid after an authorised period. You must pay back the loan in full within nine months and one day after your company’s financial year-end.
Failing to make the full repayment will result in you incurring S455 tax.
Here’s an example of how it works. Let’s say your company’s financial year runs from April 1 to March 31 and a director’s loan is paid to you on March 1. If you repay the loan before January 1, there will be no tax to pay.
But should you still have repayments to make by January 1, then the loan will be subject to the S455 tax, which is 33.75%. That’s the same higher rate of dividend tax that would be charged if the funds were declared as a dividend instead of a loan. That means a £5,000 loan unpaid by the deadline would incur S455 tax of £1,687.50!
How do you pay S455 tax?
S455 tax is paid when you pay the rest of your Corporation Tax bill. But because it is classed as a ‘temporary tax’, you can reclaim the tax you paid from HMRC once the loan is paid in full. But if you have paid any interest, it cannot be reclaimed.
The tax can be reclaimed 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. These claims should be made within 4 years.
A director’s loan can be repaid with cash or it can be possible to reallocate some shares of the company for some or all of the outstanding loan as a dividend instead. This effectively reduces the loan balance.
Multiple director’s loans
HMRC has rules about the dates loans are taken and the amount that was loaned. This is to clampdown on directors taking a loan, repaying it in full within 30 days and then taking out another loan for the same amount. This is classed as ‘Bed and Breakfasting’. And HMRC will class this as the original loan and they won’t class it as being repaid.
Legally, you must keep track of the dates and amounts taken. Failing to do so could mean you can unintentionally fall into the trap!
If you take out more than one director’s loan, it is essential that you keep track of and repay them all on time. Failing to do so could mean HMRC claiming S455 tax is charged on the whole amount of multiple loans rather than just the one outstanding balance.
Speaking to your accountant will help ensure you pay what you really owe. You can contact our experienced team for a no obligation chat.
What if the company closes?
The director or directors of a company that ceases trading with outstanding loan balance might have to reclassify outstanding loans as income or distribution and the tax. You might also need to pay National Insurance.
Where a company becomes insolvent, the director or directors could be pursued by an individual or appointed company to recover monies owed. This includes any outstanding director’s loans where the account is in debit.
What to do next
If you’re unsure about S455 tax or director’s loans, we can help. Contact us today for details.
