S455 Tax Explained: Director’s Loan Account Rules & Charges

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 and compliance implications to consider.

Key Takeaways

• Keep accurate and detailed records of all director’s loans through your Director’s Loan Account (DLA).
• Be aware of S455 charges, repayment deadlines, and Benefit in Kind tax implications.
• Always check the latest HMRC official interest rate before calculating benefits.
• Seek the advice of a qualified accountant if unsure about any regulations or tax consequences.

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 director’s loan 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 tax 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 and subject to change by HMRC).

• If the loan is repaid within 9 months of the company year end, 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, which is set and reviewed periodically.

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 (for example, 2.25% in 2023/24). Always check HMRC’s latest published rate before calculations.

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 for tax purposes.

• 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 the specific 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 at the director’s marginal rate.

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 where required.

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.