S455 tax – what business owners need to know

If you have your own Limited Company there may be times where you lend money to your company, which traditionally comes without tax implications. But what about when you need to personally borrow money from your Limited Company, and the process is flipped around?

In this blog we explore what S455 tax is, how much it may cost and when the costs might be incurred.

S455 tax and directors loans – what are they?

If you have any director’s loans that still have amounts left to be paid past their permitted payment period, then you’ll be subject to S455 tax. A type of Corporation Tax, S455 tax was originally created to tax those who’ve failed to pay back director’s loans after a particular period. If you have director’s loans you have a total of nine months after the 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 1st October 2024 to 30th September 2025
• You take out a director’s loan on 5th October 2024
• The loan must be repaid by 30th 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.

How much can you expect to pay when subject to S455 tax?

The current rate for S455 tax is 33.75% of the loan’s outstanding value, this is because HMRC tax it at the same rate as dividends falling within the higher rate tax band.

For example, the additional amount you can expect to pay for a £40,000 unpaid loan would be £13,500 in S455 tax.

How and when do you pay your S455 tax?

S455 tax is a form of Corporation Tax, and is therefore treated as such, so any S455 tax payments are paid alongside your Corporation Tax bill. Whilst is can be an inconvenience having to pay an additional tax bill, it’s worth understanding that S455 tax is temporary, and you’re able to claim it all back once you’ve repaid the original loan in full.

You can repay the total amount back to your company in cash. Whilst this would solve the main problem, you’ll find that 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 there’s enough profit in the company to be able to do so. So instead of taking out your dividends from the company, you use them to either repay your loan in full, or part of what you owe. Your SG accountant will be able to advise you further on this, and the tax implications associated with doing so.

How do you get your S455 tax back once you’ve repaid the outstanding director’s loan amount?

Reclaiming the amount of S455 tax paid will depend on when you repaid the original director’s loan in full:

If you’re reclaiming S455 tax for loans repaid within 9 months of relevant yearend – you’ll need to fill out a CT600A form when completing your Corporation Tax form.

If you’re reclaiming S455 tax for loans repaid after 9 months of the relevant yearend – you’ll need to complete a L2P form. The earliest this form can be submitted to HMRC is 9 months and 1 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 have more than one withdrawal from your director’s loan account, ensure everything has a paper trail to track all your movements, and that you’re up to date with the latest rules surrounding how many withdrawals you’re able to make at any one time. Correct records are essential to ensuring you don’t find yourself with cashflow issues or poor financial health in the future.

It’s worth noting that:

• If you repay a loan in full then take a second loan out less than 30 days later, HMRC will class the first loan as unpaid, as they will view it as a continuation of the first loan. In HMRC’s eyes taking out a loan so close to paying one off could be seen as to be 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’.
• The S455 will apply to all loans not repaid within 9 months of relevant yearend. If you have multiple loans this will apply to any not repaid within this time frame.

Be sure to speak to your SG accountant if you’re considering taking out multiple director’s loans to ensure everything is tracked correctly.

What happens when your company closes?

If you decide to close your company before the loan is repaid in full, then you’ll be subject to paying S455 tax. Then loan may also need to be recategorised as income or distribution, as the funds have been distributed to yourself. You’ll then be subject to paying the relevant levels of income tax and National Insurance.

Outstanding director’s loans can also still be recovered if a company becomes insolvent, and another company is appointed to try and recover any money owed.

How SG Accounting can help

As an SG client your dedicated accountant is on hand to guide you and assist with any questions you may have about a director’s loan you’re considering, or one you may already have. It’s their job to help you navigate your tax obligations, and how to best ensure you stay on the right side of HMRC. Got more questions? Simply get in touch and we’ll take it from there.