S455 Tax
Directors loans are a method of extracting money from your limited company. Although they can be an effective short-term solution to loaning money, there are tax implications to consider.
The Companies Act 2006 lifted the prohibition of loaning directors’ money from the company; the Directors Loan Account (DLA) is a record of any transactions between the company and the director that is not otherwise accounted for as salary, dividends or expense reimbursements.
Your tax liability as a director will depend on whether you owe the company money (you’re overdrawn) or if the company owes you money (in credit). If the company owes you money, you can withdraw this without any tax implications, if there is a balance owing to the company there will be tax implications.
S455 charge
If there is any balance outstanding on your directors’ loan account at your company year end, which would include over-paid expenses, salary or dividends that have been paid in excess of profits, this will give rise to an S455 charge.
The S455 charge is calculated as part of your corporation tax return at 33.75% of the outstanding balance at your company year end. If you repay this within 9 months of the company year end, either in full or in part the S455 charge will be recalculated.
If you do not repay the loan within 9 months of the company year end, you will need to pay the S455 charge, however when the director’s loan is repaid you can request that this is repaid to you.
Personal tax – Benefit in Kind
HMRC regard an interest free loan from the business as a taxable benefit. This means that if the business does not charge any interest on the director’s loan, HMRC will use the official rate of interest to calculate the value of the benefit.
For 2019/20 the official rate of interest is 2.5%. If a loan was outstanding for 12 months at £10,500 this would mean that the benefit would be calculated at 2.5% of £10,500, a total of £262.50. This would be included on your P11d and the National Insurance Contributions calculated at 13.8% would be £36.23.
The amount of the benefit (£262.50) would also be included in your self-assessment tax return and taxed accordingly.
Writing off directors loans
The Income Tax Act 2005 makes provision for releasing directors’ loans, more commonly known as writing them off. This is done through the formal process of a deemed dividend, under the Income Tax Act 2005. HMRC oftentimes classifies written off loans as remuneration, and as such will seek NICs, although the amount is treated as a dividend and attracts tax credits.
In credit: directors’ loan to company
If the company’s legal structure (Articles of Association) allow for the receipt of borrowed money from directors, it may sometimes be the better option in a circumstance where the company requires growth capital input at a better rate than through another lender, or if the business is cash strapped during start-up. Another form of directors’ loan can be the purchase of equipment for the company funded by the director.
It is the lender (in this case, the director) who decides whether to charge interest or not. If interest is charged, it needs to be declared on the annual Self-Assessment Tax Return and will attract income tax.
Insider insight: is it a bad idea to take a director’s loan? How much can I take?
It became permissible to make loans to directors in 2007, provided the company was financially capable of doing so, and that prior shareholder approval was obtained. The only negative implication associated with taking out a director’s loan is the associated tax bill – although this amount is directly linked with the loan amount and interest payable.
In summary; accurate and detailed records are required in any company, and more so in the case of financial reporting in a limited company. Be aware of the rates attracted on directors loans, and seek the advice of a qualified accountant if you are unsure about any of the regulations or implications involved.