What is S455 tax?

S455 tax is a charge imposed by HMRC on loans made by a company to its directors or shareholders when those loans are not repaid within a specified timeframe. This tax applies primarily to close companies (companies controlled by five or fewer shareholders or directors) and aims to prevent individuals from avoiding income tax by taking loans instead of salary or dividends.

S455 tax is designed to discourage directors from withdrawing company funds as loans rather than taking them as income, which would be subject to PAYE (Pay As You Earn) tax and National Insurance contributions. Understanding S455 tax is crucial for ensuring compliance and avoiding unnecessary tax liabilities.

When does S455 tax apply?

The tax applies when:

• A director or shareholder borrows money from their company.
• The loan is not repaid within nine months and one day after the company’s financial year-end.
• The loan exceeds £10,000 without being declared and taxed as a benefit-in-kind.
• The loan is not structured as an advance against salary or dividends.

If the loan is outstanding beyond the repayment deadline, the company is required to pay S455 tax to HMRC. This rule prevents the misuse of company funds and ensures that directors are not avoiding personal tax obligations through interest-free or low-interest loans.

How is S455 tax calculated?

The current S455 tax rate is 33.75% of the outstanding loan amount at the end of the accounting period. This rate aligns with the higher dividend tax rate to ensure fairness in the taxation system.

For example, if a director borrows £20,000 and does not repay it within the required timeframe, the company will need to pay £6,750 (33.75% of £20,000) in S455 tax to HMRC.

This tax is not a permanent charge. If the loan is later repaid, the company can apply for a refund, but only after a certain period (see below for details on reclaiming S455 tax).

How to avoid S455 tax

To avoid paying the tax, directors and shareholders can:

• Repay the loan before the deadline.
• Declare the loan as a dividend, salary, or bonus, ensuring proper tax deductions.
• Write off the loan as part of their remuneration package, subject to income tax and National Insurance.
• Charge commercial interest on the loan to avoid it being classed as a taxable benefit.

Another common strategy to avoid the tax is ensuring that the director’s loan account remains in credit. By regularly reconciling company accounts and structuring withdrawals properly, directors can minimise their risk of S455 tax liability.

Can you reclaim S455 tax?

Yes! If the loan is repaid after the tax has been paid, the company can reclaim the tax from HMRC. However, the refund process can only begin nine months after the end of the accounting period in which the loan was repaid.

Companies can reclaim S455 tax through their corporation tax return or by submitting a formal claim to HMRC. It’s essential to maintain clear records of loan repayments to ensure a smooth refund process.

Consequences of not paying S455 tax

Failure to pay the tax can lead to:

• HMRC penalties and interest charges.
• Additional tax liabilities if the loan is considered a distribution or salary.
• Personal liability for directors in extreme cases.

Additionally, unpaid loans to directors may raise red flags during HMRC investigations, potentially leading to broader audits of company accounts. Directors should always seek professional advice if they are unsure about their S455 tax obligations.

Common misconceptions

• “S455 tax is a personal tax on the director.” Incorrect, S455 tax is levied on the company, not the individual.
• “Once S455 tax is paid, the loan is settled.” False, the company must still collect repayment or face additional tax consequences.
• “S455 tax applies to all loans.” No, it only applies to outstanding loans at the end of the company’s accounting period.

Summary

Understanding S455 tax is crucial for directors and shareholders who take loans from their companies. Managing director’s loans effectively can help avoid unexpected tax bills and compliance issues.

By staying informed, ensuring timely repayments, and structuring withdrawals appropriately, directors can protect themselves and their businesses from unnecessary financial burdens.

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