As a Limited Company director there may be times when you have to lend your company money, which will usually not result in any tax implications. So what happens when you personally need to borrow money?

In this blog we take a closer look at what S455 tax actually is, the potential cost and when it might be incurred.

S455 tax and directors loans – what are they and the differences

S455 tax is due when any remaining amounts are left to pay on any director’s loans past their permitted payment period. A type of Corporation Tax, S455 tax was originally created to tax those who’ve fallen behind in paying off their director’s loans after a certain period of time. Director’s loans must be paid back nine months after your company’s financial yearend in which you took the money out, to repay the total amount.

For example:

• Your company’s financial year runs from 1^st October 2024 to 30^th September 2025
• You take out a director’s loan on 5^th October 2024
• The loan must be repaid by 30^th June 2026 (9 months after the year-end)

If not paid in full, you’ll be subject to paying the 33.75% S455 tax on the outstanding loan’s balance.

If you’re subject to S455 tax, how much can you expect to pay?

S455’s current rate is 33.75% of the loan’s outstanding value. HMRC tax it at the same rate as dividends that fall within the higher rate tax band.

For example, if you had an unpaid loan of £40,000 the additional amount you can expect to pay is £13,500 in S455 tax.

When and how do you pay your S455 tax?

S455 tax is a form of Corporation Tax, therefore any S455 tax payments are paid alongside your Corporation Tax bill. Paying extra tax is never ideal, but it’s worth noting that S455 tax is temporary, as you’re able to claim it back once the original loan has been paid in full. You’re also able to repay part of the loan.

You’re able to pay the total loan amount back to your company in cash. Whilst this would solve the problem, as a shareholder of your Limited Company it might be easier and potentially more tax efficient to vote a dividend to reduce your director’s loan balance, so long as your business has enough profit to do so. So instead of taking a dividend out, you’ll use it to pay a loan in full, or part of what you owe. Your Vantage Client Director will be able to advise you on this topic, and the tax implications associated with doing so.

How is your S455 tax is returned to you once the loan has been repaid in full?

How you’re able to reclaim the amount of S455 tax paid will depend on when you repaid the original director’s loan in full:

Reclaiming S455 tax for loans repaid within 9 months of relevant yearend – you’ll need to complete a CT600A form when completing your Corporation Tax form.

Reclaiming S455 tax for loans repaid after 9 months for the relevant yearend – you’ll need to complete a L2P form. The earliest you’re able to do this is nine months and one day after the yearend in which the repayment of the loan has been received.

What happens when you have more than one director’s loan?

If you make more than one withdrawal from your director’s loan account, be sure that everything is accounted for and has a paper trial, and that you’re up to date with the latest rules surrounding the number of withdrawals you’re able to make at any one time. Cashflow issues or poor financial health can occur when correct records aren’t kept, so it’s essential to keep on top of it all.

It’s worth understanding that:

• If you repay the loan in full then take out a second loan less than 30 days later, HMRC will consider the first loan as ‘unpaid’, as the new loan will be viewed as a continuation of the existing one. HMRC will see a new loan as trying to get around the rules surrounding the S455 tax period, and therefore S455 tax would still apply. This process is also known as ‘bed and breakfasting’.
• S455 tax is applied to all loans that aren’t repaid within 9 months of the relevant yearend. If you have multiple loans this rule will apply to any not repaid within this timeframe.

Ensure you speak to your Vantage Accounting Client Director if you’re considering taking out multiple director’s loans to ensure everything is tracked correctly.

How Vantage Accounting can help

As a Vantage Accounting client your dedicated Client Director is on hand to offer you support and guidance with any questions you may have about a director’s loan that you’re considering, or one that you may have already taken out. It’s our team’s job to help you navigate your tax obligations, and how to best ensure you stay on the right side of HMRC. Have any more questions? Get in in touch and we’ll take it from there.