Understanding Section 455 Tax: A Guide for Directors and Personal Companies

When managing personal or family companies, directors often choose to borrow funds from the company. This can be a more convenient and cost-effective option compared to commercial loans. However, it’s crucial to understand the tax implications for both the director and the company.

Tax Implications of Director Loans

If the loan balance exceeds £10,000 at any point in the tax year, a tax charge may be incurred under the benefit in kind rules. This happens if the interest paid by the director on the loan is less than the official rate. The taxable amount is the difference between the interest due at the official rate and any interest actually paid. Additionally, the company is responsible for paying Class 1A National Insurance on this taxable amount.

Section 455 Tax in Close Companies

For close companies, which typically include most personal and family companies, additional tax consequences arise if the director’s loan account is overdrawn at the year end and remains so nine months and one day after the year end. A close company is generally defined as one controlled by five or fewer persons. In such cases, the company must pay tax on the outstanding loan balance, known as section 455 tax. The rate of this tax is linked to the dividend higher rate, currently 33.75% for loans made on or after 6 April 2022.

It’s important to note that section 455 tax is not corporation tax and is temporary. It becomes repayable once the loan balance is cleared.

Reclaiming Section 455 Tax

The tax can be reclaimed nine months and one day after the end of the accounting period in which the loan was repaid, released, or written off. The tax becomes repayable on the due date for the corporation tax of that period. For partial repayments, you can reclaim the tax corresponding to the repaid portion.

To make a claim, use form L2P, available on the Gov.uk website. You’ll need your Unique Taxpayer Reference (UTR), bank details, and specific information about the loan and repayment dates. An agent can also make this claim on your behalf.

After submitting your claim, HMRC will issue a revised tax calculation. Any reclaimed tax will first offset against any corporation tax due, with any excess refunded by HMRC.

Understanding the intricacies of section 455 tax is crucial for directors and personal companies to ensure compliance and optimise financial management. If you would like further guidance or assistance with this process, please get in touch.

 

 

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