What is S455 tax?

All transactions between a company’s director and the limited company are posted through the director’s loan account. 

A director may lend the limited company money in times of need and visa versa. In principle doing this isn’t a problem and is very common place in Small owner managed businesses. 

The potential problems can arise at a company’s year end when the directors loan account is overdrawn. This means that the company has leant the director money that the director hasn’t paid back or declared as a dividend or salary payment. 

How is S455 tax calculated to a director’s loan account? 

For loans made after 6th April 2022 a temporary tax charge of 33.75% is made against the outstanding balance in the directors’ loan account, assuming that the loan account is more than £10,000 overdrawn. 

This tax is payable alongside the normal corporation tax accrued during the companies accounting period. The difference is, S455 tax is repayable to the company if one of three things happen

  1. The outstanding loan is paid back within 9 months of the company year end
  2. The loan is Declared as a dividend
  3. Declare the loan as a bonus

Option one is preferable as options two and three will result in tax bills for the director who took the loan out.

overdrawn loan accounts and company loans are fine when the loan is a genuine loan and you understand when the money is due back for payment. 

Unfortunately, sometimes company directors don’t keep track of how much money they are extracting form their companies, leaving them in a situation where they have unintentionally withdrawn more money than they are able to declare as a divided. 

This may mean they are unable to pay the money back within 9 months of the year end leaving them with a potential S455 tax cash flow issue. 

The problem is further exacerbated when there is not enough profit in the company to declare the balance as a dividend. This can happen when you company takes out a loan and you withdraw the money for personal use for example. 

In this situation the only two options left are paying the S455 tax and declaring the money as a bonus. Neither of these are likely to be favourable in terms of minimising tax.

As always prevention is better than cure and the way to avoid accidentally getting yourself in this position is to review your drawings and company profit on a quarterly basis at the very least.