S455 Tax Explained

Navigating taxes as a contractor or freelancer can be confusing. There’s a lot to get your head around – from the self-assessment and its deadlines to Corporation Tax, VAT and IR35.

There are also director’s loans – which, if you have a limited company, refer to any money lent to the company by the director, or vice versa – and carry certain tax obligations.

From time to time, the company may need a temporary injection of cash, or the director may need to borrow monies from it instead. Monies loaned to the company do not usually carry any tax implications. They can just be repaid to the director, as soon as profit and cash are available. Monies borrowed by the director may carry tax implications, however, which can depend on the amounts borrowed, and the time taken to repay them.

One of the taxes that a director’s loan might incur is the S455 tax, which we focus on in this guide.

How does S455 relate to a director's loan?

S445 refers to Section 455 of the Corporation Tax Act 2010. Essentially, the S455 tax applies to director’s loans which have gone unpaid beyond the permitted period.

Director’s loans must be repaid in full within nine months and one day of the company’s financial year-end.

So, for example, if the company’s year runs from 1st April to the following 31st March, and a director’s loan was made on March 1st, you must repay it before the 1st January the following year if you wish to avoid tax implications.

If the loan isn’t repaid within that window, it will incur the S455 tax. The S455 tax rate is 33.75% of the loan's value outstanding at the nine months and one day cut-off for loans made after 6th April 2022. This is set at the same higher rate of dividend tax that would be charged if the monies had been declared as a dividend in that year instead of as a loan. So, a loan of £10,000 that wasn’t repaid on time would incur an additional £3,375 in S455 tax.

When is the tax paid and how?

As it’s effectively Corporation Tax, any S445 tax charge should be paid when you pay the rest of your Corporation Tax bill.

However, S455 is a ‘temporary’ tax, and you can reclaim any S455 tax paid from HMRC once the loan is fully repaid.

To repay the loan, you can either physically repay the cash back to the company, or, if there is enough profit in the company to do so. The director is also a shareholder of the company, so it may be possible to reallocate some, or all of the outstanding loan as a dividend instead, thus reducing or clearing the loan balance.

Depending on when you paid the S455 tax charge, and when you fully repaid the loan, there’s a different process to follow. You can reclaim S455 tax within the same accounting period – or within the last two accounting periods – using the CT600A form for your Corporation Tax return.

If you’re reclaiming S455 tax paid more than two years ago, you should use the L2P form alongside your next Corporation Tax return.

What if there are multiple director's loans?

There is a legal requirement to track the dates and amounts of any loans taken, and HMRC has strict rules. Where a loan is repaid and another taken within 30 days, this is called Bed & Breakfasting – where this happens, HMRC will consider the original loan as not being repaid.

In the event of multiple outstanding loans, failure to repay one loan may also incur S455 tax charges on all outstanding loans.

HMRC has issued internal guidance that states: “one account may be secured, the other unsecured; one account may bear interest, the other may be interest free… liability under Section 455 may arise if the participator is indebted to the company on any one of those accounts”.

As such, it’s important that – if you hold multiple loans – they are all repaid on time, otherwise HMRC will likely consider that the S455 tax should be charged on the whole amount of the multiple loans, rather than the single outstanding balance.

A good accountant will also provide you with ongoing tax advice throughout the year and not just at the end when it will probably be too late to save you from an excessive tax bill. In order to do this, they have to keep abreast of the UK tax system and all of its regulations and legislative changes.

If you do choose an accountant, you may have some questions regarding what they offer.

What happens if the company closes?

If your company ceases trading and there are no available funds to pay the S455 tax liability, then the director (or directors) with outstanding loan balances may need to reclassify any outstanding loan as income, or distribution, and pay the associated tax – including, possibly, National Insurance.

In the event of company insolvency, the director or directors may also be pursued by any individual or company appointed to recover monies owed – including any outstanding director’s loans where the account is in debit.

To recap

So, the S455 tax was introduced in Section 445 of the Corporation Tax Act 2010 and is effectively a Corporation Tax charge on outstanding director’s loans.

Director’s loans are those made between a company and its director (or directors) and these must be repaid, or they’ll incur tax charged at 33.75%. As long as it’s repaid within the timeframe – that is, within nine months and one day of the company’s financial year-end – there will be no S455 tax liability.

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