Section 455 Tax: The Director's Loan Account Penalty

Company money is not your money. If you withdraw cash from your limited company that is not a Salary or a Dividend, it is classified as a Director's Loan.

Borrowing from your company can be a useful short-term tool, but if you don't play by the rules, HMRC hits you with a specific penalty tax: Section 455.

What is S455 Tax?

If a director (or participator) owes money to the company 9 months and 1 day after the company's financial year-end, the company must pay S455 tax on the outstanding balance.

• Rate: 33.75% of the outstanding amount.
• Who pays it? The Company pays it (not you personally).
• Is it permanent? No. It is a "deposit" held by HMRC. You get it back when you repay the loan.

The 9-Month Rule

• Year End: 31 March 2026.
• Deadline: 1 January 2027 (9 months + 1 day).

If you repay the loan before this date, no tax is due. If you repay it after, the tax is payable.

Example

• You borrow £20,000 on 1 June 2025 to buy a car.

• You repay it on 1 December 2025.

• Result: No S455 Tax.

• You borrow £20,000.

• You haven't repaid it by 1 January 2027.

• Result: Company pays £6,750 tax (33.75%).

Benefit in Kind (The Interest Rule)

If the loan is above £10,000 and you don't pay interest to the company, HMRC treats the "interest-free" nature of the loan as a taxable perk (Benefit in Kind).

• You must report it on a P11D.
• You pay Class 1A National Insurance on the "official rate of interest" (approx 2.25%).

Solution: The company should charge you interest (at the HMRC official rate) which you must physically pay.

Anti-Avoidance: Bed and Breakfasting

Directors used to repay the loan on 31 December and borrow it back on 2 January to avoid the tax. HMRC blocked this.

• The 30-Day Rule: If you repay a loan and withdraw it again within 30 days, tax relief is denied.
• The Intent Rule: Even outside 30 days, if there is a pre-arranged plan to borrow it back, relief is restricted.

Summary Checklist

1. Clear Balance: Try to clear your Director's Loan Account (DLA) before the year-end (using a Dividend declaration).
2. Deadline: If you can't, ensure it is cleared within 9 months.
3. Charge Interest: If the loan >£10k, pay interest to avoid BIK.

Disclaimer: S455 tax is refundable, but claiming it back takes months. Avoid paying it in the first place.