If you have your own limited company, you may be aware of director’s loans already, where company directors lend money to the company, or vice versa.
Generally, sending your company money comes without tax implications. It’s just repaid to you as soon as the company can afford it. However, when it comes to you or another director borrowing money from the company, the tax rules can get a little more complicated depending on how much you borrow and how long it takes to repay it.
What is S455 tax?
S455 tax is a type of Corporation Tax charged on any outstanding director’s loans that have yet to be repaid past their permitted period.
The key point is this tax only occurs on director’s loans that haven’t been repaid over a certain time period. Basically, all director’s loans should be repaid within nine months and one day of the company’s financial year-end in which you took the money out.
How much is the S455 tax rate?
The S455 tax rate is 33.75% of the loan’s value which is outstanding once it hits the 9 month and 1 day cut-off point. It’s charged at the higher rate of dividend tax, treating it as though you were paid in dividends rather than given a loan.
When do I pay S455 tax?
Since it’s a form of Corporation Tax, you’ll pay it with your Corporation Tax bill. S455 tax is a ‘temporary’ tax, and you can claim all of it back once you’ve repaid the loan in full.
How do I reclaim S455 tax once I repay a director’s loan?
You can reclaim the S455 tax you paid for an overdue director’s loan once it’s repaid. The way you do this depends on when you finished repaying it.
What if I have multiple director’s loans?
You might make multiple withdrawals from your director’s loan account, so you need to ensure you track everything you take out and pay in, and that you know the rules regarding how many you can take out at once.
A few things to keep a note of:
- If you repay a loan, and get another out within 30 days, HMRC considers the original loan as not being repaid (known as Bed & Breakfasting). Repaying a loan purely to avoid the S455 tax period, and then taking the money straight back out again is considered to be a form of tax evasion! So don’t do it.
- Failure to repay one loan could result in all of your outstanding loans being subject to S455 tax. For example, if you don’t repay a £5,000 loan on time, and you have £10,000 of director’s loans out in total, the full £10,000 will be subject to S455 tax as opposed to the one loan of £5,000 that’s overdue.
Do I still need to pay S455 if my company closes?
Yes – if your company ceases trading before you repay the loan, you’ll still need to pay S455 tax. You might also need to recategorise the loan as income or ‘distribution’ (because funds have been distributed to you) and pay the correct income tax and National Insurance.
If your company becomes insolvent, and a company is appointed to recover any money owed, they may also try and recover any outstanding director’s loans.
If you need assistance understanding your tax or resolving errors, get in touch with our expert tax accountants today!