S455 Tax

Directors’ loans are a method of extracting money from your limited company. Although they can be an effective short-term solution, there are important tax implications to consider.

What is a Director’s Loan Account (DLA)?

The Companies Act 2006 lifted the prohibition on loaning money to directors from the company. The Directors’ Loan Account (DLA) is a record of any transactions between the company and the director that are 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 (overdrawn) or the company owes you money (in credit).

• If the company owes you money, you can withdraw this without any tax implications.

• If you owe the company money, there will be tax implications.

Section 455 (S455) Charge

If there is any balance outstanding on your director’s loan account at your company year end- including over-paid expenses, salary, or dividends 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 (rate aligned with the higher dividend tax rate, subject to change by HMRC).

• If the loan is repaid within 9 months of the company year end (in full or part), the S455 charge will be reduced accordingly.

• If the loan is not repaid within 9 months, the company must pay the S455 charge. Once the director’s loan is repaid, the company can reclaim the S455 tax from HMRC after 9 months following the end of the accounting period in which the loan was repaid.

Personal Tax – Benefit in Kind

HMRC regards an interest-free or low-interest loan from the business as a taxable benefit. If the business does not charge interest, HMRC applies the official rate of interest (set annually).

Example: If a loan of £10,500 is outstanding for 12 months and the official rate is 2.5%, the benefit would be calculated as £262.50. This amount is:

• Reported on your P11D.

• Subject to Class 1A National Insurance Contributions at 13.8% (£36.23 in this example).

• Included in your Self-Assessment tax return and taxed as income.

Note: The official rate changes periodically (e.g., 2.25% in 2023/24). Always check HMRC’s latest published rate.

Writing Off Directors’ Loans

The Income Tax Act 2005 allows for directors’ loans to be written off (released). This is usually treated as a deemed dividend.

• HMRC may treat the written-off loan as either remuneration (subject to PAYE and NICs) or as a dividend (subject to dividend tax at the director’s applicable rate).

• Tax treatment depends on circumstances and HMRC’s view of the transaction.

When the Company Owes the Director (In Credit)

If the company’s Articles of Association allow it, a director can lend money to the company. This may be useful if the company requires growth capital or is cash-strapped during start-up.

• The director may choose whether to charge interest.

• If interest is charged, it must be declared on the director’s Self-Assessment tax return and will be subject to income tax.

Should You Take a Director’s Loan?

Since 2007, it has been permissible to make loans to directors, provided the company is financially capable and shareholder approval is obtained.

The main drawback of taking a director’s loan is the associated tax bill, which depends on:

• The loan amount.

• Repayment timing.

• Whether interest is charged.

Key Takeaways

• Keep accurate and detailed records of all director’s loans.

• Be aware of S455 charges, repayment deadlines, and Benefit in Kind implications.

• Always check the latest HMRC interest rate.

• Seek the advice of a qualified accountant if unsure about any regulations or tax consequences.

FAQs on S455 Tax and Directors’ Loans