What Small Business Owners Need to Know
Borrowing money for personal or business needs? It’s important to know how taxes come into play. If you’re a director of a limited company in the UK, taking out a director's loan could bring some unexpected tax surprises, thanks to the S455 tax charge. But what is S455 tax exactly? How does it work? And, most importantly, how can you avoid paying more than you need to?
In this blog, we’ll break it all down for you—covering the tax rate, how to reclaim it, and smart tips to reduce your S455 tax obligations. Think of this as your handy guide to understanding and navigating S455 tax with ease!
What Is S455 Tax?
S455 tax comes from Section 455 of the Corporation Tax Act 2010 and applies to unpaid loans directors take from their limited companies. Basically, it’s there to stop directors from pulling large amounts of money out of their companies without paying the usual taxes like they would on dividends or salaries.
Here’s the main thing to remember: if you take a director’s loan, you need to repay it within nine months and one day after your company’s financial year-end to dodge the S455 tax charge.
For example: If your company’s year-end is March 31 and you borrow money in mid-March, you’ll need to repay it by January 1 of the following year to avoid getting hit with the tax. Keep that deadline in mind!
What is the S455 tax charge?
The S455 tax rate is 33.75% for loans taken after April 6, 2022, matching the higher dividend tax rate. For example, if a £10,000 loan isn’t repaid by the deadline, a tax charge of £3,375 will apply.
Loans of £10,000 or less are generally exempt from this charge unless special conditions, like multiple loans or tax breaches, apply. However, borrowing more than £10,000 will trigger the tax, so it’s important to keep track of how much you borrow.
S455 Tax Collection
The S455 tax, while labeled as a Corporation Tax charge, is not a permanent cost. It’s a provisional tax that you can reclaim once the loan is repaid. However, if the loan isn’t repaid by the deadline, you’ll need to pay this tax along with your company’s regular Corporation Tax.
How to Reclaim S455 Tax
Do you get S455 tax back?
The S455 tax on director loans is recoverable if the loan is repaid in full or cleared by converting it into salary or dividends. Here’s a simple breakdown of how to manage and reclaim S455 tax effectively.
Repayment of Loan
The easiest way to avoid ongoing S455 tax liability is to repay the loan to your company. To ensure HMRC accepts this, the repayment should be recorded in the company’s loan account, clearly showing the balance has been resolved.
Clearing the Loan with Dividends
If you’re a director and also a shareholder, you can declare some or all of the outstanding loan as a dividend payment. This offsets the loan and removes further S455 tax obligations. However, be aware this may result in personal tax liabilities depending on the repayment method and your individual tax allowances.
Timing and Filing for S455 Tax Reclaim
Timing is crucial when reclaiming S455 tax. The refund is usually processed as part of your Corporation Tax return in the year following the loan repayment.
- If repaid within two years of the original accounting period, use the CT600A form to reclaim the tax.
- If repaid after two years, file an L2P form alongside a future Corporation Tax return.
Keep in mind that HMRC may take several months to process the reclaim, so submit accurate and detailed records to avoid delays.
Why Accurate Records Matter
To reclaim S455 tax successfully, maintaining detailed financial records is essential. Proper documentation ensures HMRC can verify loan balances and repayments without complications.
By repaying or clearing your director’s loan on time and submitting the necessary forms, you can recover S455 tax efficiently while staying compliant with HMRC regulations.
How to avoid S455 tax charge?
Keep Track of Loan Balances
Make sure to monitor how much money you borrow from the company and avoid exceeding the £10,000 limit unless absolutely necessary. Using spreadsheets or accounting software can help flag any risks of going over the threshold early on.
Avoid ‘Bed and Breakfasting’
If a director repays a loan but borrows it back within 30 days, this is called “bed and breakfasting.” HMRC considers this a way to avoid tax and may still apply S455 tax as if the loan wasn’t repaid. To stay compliant, avoid frequent back-and-forth loan activity.
Get Professional Advice
An experienced accountant can guide you on how much to borrow, repayment schedules, or whether something like dividends or bonuses might be a more tax-efficient option. Good advice can prevent costly mistakes and save your business money.
Be Aware of Insolvency Risks
If the company stops trading without repaying loans or covering the S455 tax, directors are still responsible. Unpaid loans might be treated as personal income, leading to income tax and National Insurance charges. Without a repayment plan, liquidators or insolvency practitioners could pursue directors.
What Happens to S455 Tax if the Loan Goes Unpaid?
If a company stops trading and the director's loans remain unrepaid, those loans may be classified as a distribution, such as income. This can carry income tax and possibly National Insurance liabilities.
HMRC may pursue directors personally for these unpaid amounts if the company’s assets cannot cover them. Taking this risk as a director is ill-advised without an actionable repayment or clearance plan for the loan balance.
Summary
Section 455 tax, or S455 tax, prevents company directors from borrowing large sums without facing tax consequences. Key points include:
- Loans to directors must be repaid within nine months and one day of the company’s financial year-end to avoid S455 tax.
- The tax rate is 33.75%, applicable to loans exceeding £10,000.
- Failure to repay on time results in a temporary tax charge, which is recoverable upon full repayment or proper reallocation as dividends/salary.
- Keeping track of all loan activities and working with accountants ensures compliance and minimizes risks.
Need help navigating director’s loans or reclaiming S455 tax? Contact our team today for expert support and tailored strategies for your business.
