Last year, I worked with a director who thought he was managing his company’s finances well. He’d borrowed £34,000 from his business to cover a personal emergency, planning to repay it when cashflow improved. Months later, a letter from HMRC landed on his desk: a Section 455 tax charge of over £11,000. He’d never heard of it. The shock and stress were immense — and he’s not alone.
Section 455 Tax Charge
- Section 455 tax is 33.75% on overdrawn director loan accounts.
- It applies if the loan isn’t repaid within 9 months of year-end.
- HMRC will reclaim the tax if the loan is repaid later.
- There are ways to manage or avoid the charge.
- Professional advice can save you money and stress.
What is Section 455 Tax?
Section 455 tax is a charge HMRC applies when a director borrows money from their company and doesn’t repay it within nine months of the company’s year-end. The current rate is 33.75% of the outstanding loan balance. This can catch directors off guard, especially if they’re unaware of the rules.
Why Does HMRC Charge Section 455 Tax?
HMRC wants to prevent directors from taking money out of their companies tax-free. If you borrow from your company and don’t repay it promptly, HMRC treats it as a potential way to avoid income tax and applies Section 455 to discourage this.
How Much Could You Owe?
If you have an overdrawn director loan account of £20,000, the Section 455 tax would be £6,750. For my client, the £34,000 loan triggered a bill of £11,475. This is on top of any personal tax you may owe if the loan is written off or not repaid.
What Are Your Options?
- Repay the loan: If you repay within nine months, no Section 455 tax is due.
- Declare a dividend: If profits allow, a dividend can clear the loan, but this may trigger personal tax.
- Leave the tax paid: If you can’t repay, the company pays the tax, but it can be reclaimed if you repay later.
- Seek advice: An insolvency practitioner like me can help you plan the best route.
How to Avoid Section 455 Tax
- Keep accurate records of director loans.
- Plan repayments before the nine-month deadline.
- Speak to your accountant or a specialist early.
Key Takeaways
- Section 455 tax can be a nasty surprise for directors.
- It’s 33.75% of any overdrawn loan not repaid in time.
- There are ways to manage or avoid the charge.
- Early advice from a professional like Chris Worden can save you money and stress.
FAQs
- What triggers a Section 455 tax charge?
- If a director loan isn’t repaid within nine months of the company’s year-end, HMRC charges Section 455 tax at 33.75%.
- Can I reclaim Section 455 tax if I repay the loan?
- Yes, if you repay the loan later, the company can reclaim the Section 455 tax from HMRC.
- Does Section 455 tax apply to all director loans?
- No, only to loans not repaid within nine months of the company’s year-end.
- What if I can’t repay the director loan?
- You may need to pay the Section 455 tax, but professional advice can help you explore your options.
- Can dividends clear a director loan account?
- Yes, but only if the company has sufficient profits. This may trigger personal tax for the director.
