S455 charge, BIKs and how to save tax on your Directors Loan Account!

The Director’s Loan Account (aka the DLA) can inadvertently cost you additional tax at year end; and this catches out many LTD owners!

But there are actions you can take to reduce (or even eliminate) this additional charge.

Read on!

DLA. Let’s be clear

The owner of a LTD can extract cash in a number of ways: salary and dividend being two popular ones.

However, if they take out more cash than this, it’s generally recorded as a loan in their DLA.

This ‘loan’ can have 2 implications for tax:

Implication 1: Benefit in Kind:

If the loan exceeds £10,000 HMRC says that it is a taxable benefit (a BIK) and the Director has to pay interest on it (at HMRC's official rate of interest).

The taxable benefit then needs to be reported on form P11D and further tax paid on it.

So for tax planning, keep your DLA below £10,000 at all times.

Implication 2: S455 tax charge:

A tax charge arises whether the loan is above £10,000 or not.

If the loan is still outstanding for more than nine months and one day after the company’s accounting period end, it has to be included the company tax return and will trigger what HMRC calls a “S455 tax charge”.

The charge from 06 April 2022 is 33.75% (was 32.5%) of any new loan amount made in that year.

S455 tax charge: your options

You have 2 options:

Option 1: Take action within 9 months

If you repay your DLA within the 9 month period after our year end, there is no S455 charge to pay. You can do this by way of salary, dividend, or by cash.

Option 2: Claim it back later

Although referred to as a tax ‘charge’, you can actually just pay the charge and reclaim it back from HMRC once you have repaid your DLA in the future; although there are certain timelines involved with this and you may not see your cash again for a while.

A bit of bed and breakfast!

HMRC has what they call anti-'bed and breakfasting' rules. These are where a loan is repaid but then a similar sum ‘re-loaned’ to the owner shortly after. So you can’t get around the charge by repaying your loan, and then taking out another one within 30 days - HMRC don’t see this as paying it off, and the S455 charge still applies.

Summary

Keep track of your DLA.

Keep it below £10,000 if you can.

Know what it is at your year end and decide the action that best fits with your cash flow planning.