What is S455 Tax? A Simple Guide for Small Business Owners

If you run a small business and are looking to take a loan from it, understanding Section 455 (S455) tax is essential. This tax applies when directors or shareholders borrow money from their company and don’t repay it within a certain timeframe. Here’s a simple breakdown of what you need to know.

What is Section 455 Tax?

S455 (Section 455) tax is a charge that comes into play when you, as a director or shareholder, borrow money from your company, and the loan is still unpaid at the end of the financial year. The aim is to prevent using company loans to avoid paying income tax and National Insurance.

When Does S455 Tax Apply?

Section 455 tax is triggered under these conditions:

• Loan to a Participator: If you, as a director or shareholder (or a family member), borrow money from your company.
• Outstanding Loan at Year-End: The loan is still unpaid when the company’s financial year ends.
• Repayment Window: You don’t repay the loan within nine months and one day after the end of the company’s financial year.

For example, if you owe your company £1,000 at the end of the year, you would owe £337.50 in S455 tax to HMRC, in addition to any corporation tax.

How Can You Reclaim S455 Tax?

There are ways to get back S455 tax you’ve paid:

1. Repaying the Loan: If you repay the loan within nine months and one day after the financial year ends, you might be eligible for reclaim.
2. Dividend Payments: If you repay the loan by taking a dividend (which is taxed as income), you might be eligible for reclaim.
3. Special Circumstances: Sometimes, you can apply to HMRC for relief from Section 455 tax if the loan was used for specific business purposes, like buying shares in the company.
4. Post-Relief Repayment: If HMRC grants relief and you meet the conditions, you might be eligible for reclaim.

Managing S455 Tax

To avoid Section 455 tax surprises, keep good records of any loans you take from your company. Regularly check your company’s financial status and ensure loans are repaid promptly.

Section 455 tax ensures company funds are used properly and not as a way to avoid taxes. By understanding how it works, you can manage your business finances better. For personalized advice and support on handling S455 tax, contact Helpbox.