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.

In the majority of cases, sending your company money comes without tax implications. It’s just repaid to you, the director, as soon as the company can afford it. But 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.

In this blog we’ll delve into S455 tax for director’s loans, and when you’re likely to incur it.

What is S455 tax?

In a nutshell, 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. It was originally introduced under Section 455 of the Corporation Tax Act 2010.

The key point to note 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.

For instance, let’s say your company’s financial year runs from 1st June 2024 to 31st May 2025, and you take out a director’s loan on 10th May 2025.

• If you repay all of the loan before 1st March 2026 (9 months and 1 day from the end of that financial year) then you won’t pay any tax
• If you don’t, you’ll need to pay S455 tax on the outstanding amount

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.

For example, a £20,000 loan that hadn’t been repaid would incur an additional £6,750 in S455 tax.
 

When do I pay S455 tax?

Since it’s a form of Corporation Tax, you’ll pay it with your Corporation Tax bill. The good news is the S455 tax is a ‘temporary’ tax, and you can claim all of it back once you’ve repaid the loan in full.

There are different ways to repay your loan. An obvious one would be repaying the company by sending it cash. But, if you’re also a shareholder of your company, you could ease some of the burden by using any dividends you have instead (provided there’s enough company profit to do so). Rather than taking your dividend out of the company, you’ll offset it against your director’s loan account, reducing the balance of what you owe.

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.

Reclaiming S455 tax for the same accounting period

To do this you’ll need to use the CT600A form when filing your Corporation Tax return. This also applies if you’re reclaiming S455 from the last two accounting periods.

Reclaiming S455 tax after 2 or more years

In this instance, you’ll use a L2P form with your Corporation Tax return.

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. It’s super important you keep accurate records, because if you don’t, you could end up with severe cash flow problems and poor financial health.

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 (also 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.

It’s always best to speak with an accountant first before taking out multiple director’s loans.

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 recategorize 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.

 
Need an accountant to guide you through director’s loans? Give us a call on 020 3355 4047 or get an instant online quote.