All loans to directors and shareholders (participators) from a company must now be taxed under Section S455 of the Corporation Tax regulations.

The aim of this change is to prevent company directors avoiding personal tax and national insurance contributions by paying themselves via loans which are not repaid, rather than taking a salary or dividends.

Any loan which was taken prior to 6th April 2016 will be liable to 25% tax. If the loan was taken after 6th April 2016 then 32.5% tax will be due (the same amount paid on higher rate dividends). There is NO tax free allowance and this is due to be paid by the company and will be calculated when the annual corporation tax return is prepared.

There is still a £10,000 allowance before any Class 1 National Insurance or Benefit in Kind tax is payable by the director themselves. This is calculated on the individuals’ self-assessment tax return.

Once a participator’s loan is repaid, the company may reclaim the tax paid but they cannot reclaim any interest paid. A claim needs to be done within four years and it can only be made nine months and one day after the end of the corporation tax accounting period of when the loan was repaid. The tax will not be repaid before this time.

If the loan is repaid within nine months and one day of the end of the corporation tax accounting period, you can avoid the tax due on the directors’ loan.

Example 1:

  • Sample Ltd’s year end is 31st March 2016.
  • The director took a £10,000 loan on 28th March 2016.
  • The loan was repaid on 1st January 2017 (nine months and one day after the year-end).
  • No Tax will be due.

If the loan is not repaid within nine months and one day then tax will be due and interest (currently set at 2.5%) on the tax will be added until either the tax is paid or the loan is repaid.

Example 2:

  • Sample Ltd’s year end is 31st March 2016.
  • The director took a £10,000 loan on 28th March 2016.
  • If not repaid by 1st January 2017, but before the next year end of 31st March 2017, tax on the directors’ loan will be due on the tax return ending 31st March 2016, and a reclaim can be made and the repayment of tax paid will be made on 1st January 2018 at the earliest.

If not repaid by 31st March 2017, the repayment of tax will fall into the next accounting year ending 31st March 2018 and the earliest date for repayment will be 1st January 2019.

If the repayment was in April 2017, it is nearly two years before the tax repayment is made.

Additional Rules

There are additional rules that apply when repaying the loan which are as follows:

  1. Transactions within 30 days of each other will be ignored. A loan cannot be repaid and then within 30 days taken again. The repayment will be ignored and tax due on the whole loan.
  1. If a loan exceeds £15,000 and the individual makes a repayment and it is intended that the individual would borrow the money again, the repayment transaction will not count for tax purposes.

If you are confused or unsure about any aspect of Section S455 speak to Vincent & Co and we will help you to comply.