It is common for a director to borrow money from a company, regardless of whether it is a personal company or a family-run company. This is a relatively simple way of accessing any finance that might be required while it is also possible to take advantage of it being a tax-efficient way to access up to £10,000 for a period of up to 21 months tax-free.
Despite this, there are certain tax implications that have to be considered such as if the loan is still outstanding up to nine months and one day beyond the period of accounting in which it was accessed. At this point, corporation tax will be due on this date for the period as well as any corporation tax that might have to be paid for the period. As a result, the company will then be required to pay Section 455 tax on the director’s loan balance that is outstanding.
What is Section 455 Tax?
The Section 455 tax rate matches that of the dividend upper rate and so, between the 6th April 2016 and the 5th April 2022, that rate sits at 32.5%. From the 6th April 2022, the dividend tax rate saw an increase of 1.25% as the government looks to increase funds to support both health and adult social care. What this means is that the Section 455 tax rate will increase to 33.75% from this date. The Section 455 tax rate was 25% before the 6th April 2016.
So, Which Loan Should You Repay?
Section 455 tax is not like other types of tax as it is known as a temporary tax and this has to be repaid once any amount of outstanding loan has been repaid. It is possible to claim a repayment from nine months and one day following the closure of the period of accounts within which the balance of the loan was cleared. There are a number of ways in which this can be done such as bringing in funds from outside of the company, setting a bonus or salary payment against the loan or by declaring a dividend.
Should the director have a number of loans that remain outstanding, it is the right decision to ensure that those loans that are susceptible to the higher rate of Section 455 tax are cleared first. So, if you are wondering what the correct repayment order should be, then it should look like this:
- Any loans that were taken on or following the 6th April 2022 whereby the tax rate is 33.75%
- Any loans that were accessed from 6th April 2016 to 5th April 2022
- Loans accessed prior to 6th April 2016
This can prove to be a complex situation but having the right understanding of what to repay first can help you to save money. There are tax implications to consider and these can be complex, therefore, it can help to ensure that you obtain the right advice to ensure you are tax-efficient and don’t pay more than you have to.