Section 455 Tax Charge: What Is It and How To Avoid it?

If you are a director who borrows money from your own limited company, you need to know about the implications of Section 455 (S455) tax.

What Is S455 Tax?

S455 is a Corporation Tax charge that applies when a company lends money to a director, shareholder, or participator, and the loan is not repaid in time.

The unpaid balance is taxed at 33.75% which is payable by the company, not the individual.

This measure discourages directors from using loans to extract profits tax-free, instead of through salary or dividends.

How do I avoid the tax charge?

If your director’s loan is repaid within 9 months following the company year end, there will be no S455 tax due.

Alternatively, you can declare dividends, providing the company has sufficient profits, to clear the balance before the deadline.

You should ensure that clear and separate records for each loan and repayment are kept and avoid patterns of repeated borrowing and repayment.

Things To Watch Out For

• Bed & Breakfasting (30-day rule): Repaying just before the deadline and re-borrowing shortly after will likely be ignored by HMRC.

• £15,000 Arrangements Rule: If there’s an intention to re-borrow £15,000+, the repayment may not count, even outside the 30-day window.

• Low or interest-free loans over £10k may trigger benefit-in-kind charges and National Insurance Contributions.

What happens when the loan is repaid?

When the loan has been fully repaid, the company can reclaim the tax either via the Corporation Tax return or using the relevant L2P forms, however refunds can be slow this way.

It is important to keep clear documentation and records of the repayment dates.

What happens is the loan is written off?

The loan becomes taxable as income to the individual (usually treated as a dividend), and may trigger National Insurance if they are also an employee, if the loan is never repaid but instead written off.

Is borrowing from your company the right thing to do?

S455 tax is a manageable risk if caught early, but costly if ignored. As accountants, it’s vital we help clients maintain clean Director’s Loan Accounts, avoid anti-avoidance rules, and structure cash extractions properly.

Do you want to know more about S455 tax?

Please get in touch as we are here to help.

Article written by Ffion Bainbridge