What is a director’s loan?
You may have heard the phrase, director’s loan account, in discussions with your accountant, and this is where the company loans you money from company funds and is not treated as income in relation to your personal tax circumstances.
What could a director’s loan be for?
There may be a number of reasons why you may take a loan from the company, but common examples are;
- where you take regular drawings from the company, but there are not sufficient after-tax profits available in your company to treat the drawing as dividend income,
- or you have a one-off large payment to make, such as a deposit for a car or for mortgage purposes (you need this money now and can look to repay back later).
Whatever the reason for the loan from the company, there are some tax implications to be aware of.
What is Section 455 tax?
Section 455 (S.455) tax would be applied in the above examples, where you take out a loan in an accounting period, and this loan is then not repaid to the company within 9 months of the year-end date.
For example, you took a loan out in January 2023 for your 31 March 2023 year-end, and you did not repay this loan before 31 December 2023. Therefore, the company is obliged to apply and pay Section 455 tax to HMRC. The tax applied is at a rate of 33.75%, the higher rate tax for dividends (this increased from a rate of 32.5% in April 2022). The S.455 tax is charged on a company’s corporation tax return and is due for payment as per the standard corporation tax liability payment due dates (9 months & 1 day after the year-end). S455 tax is only due on the amount that has not been repaid before the 9-month deadline.
For example, you took out a loan of £15,000 in January 2023 from your company, which has a 31 March 2023 year-end date. If you repaid £7,500 in September 2023, and the remaining £7,500 was still outstanding as of 31 December 2023, then S.455 charges would be applied on the remaining £7,500 balance. The resultant S.455 tax charge would be 33.75% of this balance, totalling £2,531, due for payment by 1 January 2024.
What happens if I repay the loan after the 9 months period?
If you didn’t have the funds available to repay the loan within the 9-month period, and S.455 tax charges were applied, the S.455 tax you paid is not lost. If you can repay the loan after the 9-month period, then HMRC will refund the S.455 tax back to you. You can get a refund based on how much of the loan you have repaid in the accounting period, so if you part repay your outstanding loan, then part of the S.455 tax can be reclaimed from HMRC. For example, if you repaid your £15,000 loan in full in January 2024 as part of the 31 March 2024 year-end accounts period, you won’t be eligible to reclaim the S.455 tax paid until 9 months and 1 day after the accounts period in which the repayment was made has ended, i.e. 1 January 2025.
What if my loan is above £10,000?
If your loan from the company is more than £10,000 in total, and the loan is interest free, then this loan could be viewed as a benefit-in-kind. If this is the case, then interest on the loan at the official rate set by HMRC (currently 2.25%) would be subject to income tax and company Class 1 National Insurance contributions. One way to avoid the benefit-in-kind implications is for the company to charge interest on the loan received. If the interest charged is equal to or greater than the official rate of interest, then there will be no benefit-in-kind incurred.
What happens to my loan if I am looking to close the company?
In this scenario, the implications can be quite complex. Generally, if there are funds available in the business at the time you look to wind up the company, then the loan amount can be written off and this amount would be treated as a distribution to the director, much like a dividend payment. If the total amount of the distributions made in the course of the company being struck off is less than £25,000 in total, it will be chargeable to capital gains tax, but if it is more than £25,000 it is necessary to have the company formally wound up using an insolvency practitioner to obtain capital gains tax rather than income tax treatment. If that is the case, the insolvency practitioner will be within their rights to ask you to repay the loan before paying it back out to you as a capital distribution. So, if you are looking to close the company, it is best practice to resolve your unpaid loans if possible before commencing winding up procedures. The above treatment is subject to possible changes in HMRC interpretation of the tax rules, so it is advisable to seek professional advice before starting this process.
Author: Mark Horsfield, Business Services Manager, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date Published: 08 May 2023