Directors' / Shareholder’s Loan Accounts and S455 Tax

Directors' Loan Accounts are where the financial transactions between a company and its directors are recorded. This account keeps track of any money borrowed or taken by directors from the company and money lent by the directors to the company. It is important to note that these transactions should be recorded to maintain transparency and ensure compliance with the law and tax code.

In small companies, these transactions often are the drawings taken by the director, credits for their net salary and dividends and any payment made by the company for the director’s personal spending.

When a director borrows money from the company, it is considered a loan, and the director becomes a debtor to the company. Conversely, if a director lends money to the company, the director becomes a creditor.

Where a director or shareholder owes money to their company S455 tax applies. This is a tax charge on loans made by a company to its directors or shareholders. The purpose of this tax is to prevent the directors/shareholders from avoiding income tax by taking loans from their company that are not repaid instead of taking income on which the directors must pay income tax.

Under the S455 tax rules, if a director's loan is not repaid within nine months and one day after the end of the company's accounting period, the company is liable to pay tax at a rate of 33.75% (32.5% to 31st March 2023) on the outstanding loan amount.

Any S455 tax paid by a company will become repayable when a director’s loan account has been settled. This is because any repayment to the company will have been made from the directors/shareholders post-tax income, negating the need for this anti-avoidance provision. The refund will be given as an offset against the company’s corporation tax for the accounting period in which the loan is repaid. If there is no, or less corporation tax, then the repayable S455 tax, a cash refund can be claimed.

It is important for both companies and directors to be aware of the S455 tax and ensure that any loans made are repaid within the specified timeframe. Failure to do so can result in substantial tax liability for the company.

There is also another taxation consideration when a director’s loan account is overdrawn, this as a potential ‘benefit in kind on ‘Beneficial Loan Interest.’

A beneficial loan is where a company gives a loan to an employee or Director that carries little or no interest, allowing them to access funds without the burden of interest rates typically associated with commercial loans.

When a director’s loan account overdrawn balance exceeds £10,000 The Director/employee is deemed to receive a benefit known as "beneficial loan interest" This perceived benefit is subject to tax.

The amount it worked out by calculating the interest that would have been paid at the ‘official rate’ published by HMRC and deducting any interest charged by the company. Currently, the official rate stands at 2%. The director will be taxed on ‘notional income’ of the benefit in kind.

The company is also required to report this benefit to HMRC and pay class 1(a) national insurance at 13.8% of the benefit.

Tax on overdrawn Directors' Loan Accounts plays a significant role in the UK tax system. Properly recording and managing these transactions is essential to ensure compliance with the law and avoid unnecessary tax liabilities.