Director's Loan Account and S455 Charge
Alpha Ltd, a UK resident trading company, has a director, Jane, who is also the sole shareholder. On 1 October 2024, Jane borrowed £120,000 from the company. The loan is repayable on demand and carries no interest. Jane repaid £30,000 on 31 March 2025 and the remaining £90,000 on 30 September 2025. Alpha Ltd prepares accounts to 31 March. The company has no other loans to participators. Jane is a higher-rate taxpayer. Assume the official rate of interest is 2.25% throughout. The company wishes to know the tax consequences of the loan for the year ended 31 March 2025 and the year ended 31 March 2026.
1. Calculate the s455 charge (if any) for the year ended 31 March 2025 and explain when it is due and payable. Show your workings.
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Step 1 – Identify the loan balance at the end of the accounting period. The loan was made on 1 October 2024. Jane repaid £30,000 on 31 March 2025. The balance outstanding at 31 March 2025 is £120,000 − £30,000 = £90,000.
Step 2 – Apply the s455 rate. For loans made on or after 6 April 2022, the s455 rate is 33.75%. The charge is 33.75% × £90,000 = £30,375.
Step 3 – Due date. The s455 charge is due and payable nine months and one day after the end of the accounting period. For the period ended 31 March 2025, this is 1 January 2026. It is paid with the corporation tax return (CT600) for that period.
Step 4 – Relief on repayment. When the loan is repaid, the s455 charge is relieved. The remaining £90,000 was repaid on 30 September 2025, which falls in the accounting period ended 31 March 2026. Relief is claimed in the return for the period in which the repayment is made (the period ended 31 March 2026). The relief is the lesser of the s455 charge paid and 33.75% of the amount repaid. Here, 33.75% × £90,000 = £30,375, so the full £30,375 is relieved.
Step 5 – Timing of relief. The relief is given in the accounting period in which the repayment is made, not the period in which the loan was made. Therefore, the £30,375 is repaid to Alpha Ltd (or set off against its corporation tax liability) for the period ended 31 March 2026, not 2025. The company should ensure it claims relief in the correct return.
2. Explain the income tax and NIC implications for Jane of the interest-free loan for the year ended 31 March 2025. Assume Jane is a higher-rate taxpayer and the official rate is 2.25%.
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Benefit-in-kind charge. An interest-free loan from a close company to a participator (Jane is both a director and shareholder) gives rise to a taxable benefit under the beneficial loan rules. The benefit is the difference between the interest at the official rate and the interest actually paid. Since Jane pays no interest, the benefit is the official rate applied to the loan.
Calculation for 2024/25. The loan was outstanding for six months in the tax year 2024/25 (1 October 2024 to 5 April 2025). However, the beneficial loan rules use the average method or the precise method. The precise method is more accurate: £120,000 × 2.25% × 6/12 = £1,350. But the loan was reduced to £90,000 on 31 March 2025, so for the period 1 October 2024 to 30 March 2025 (181 days) the balance was £120,000, and for 31 March 2025 to 5 April 2025 (6 days) it was £90,000. Precise benefit: (£120,000 × 2.25% × 181/365) + (£90,000 × 2.25% × 6/365) = £1,338.90 + £33.29 = £1,372.19. The average method would give a different figure; the precise method is acceptable and often used.
De minimis exemption. The benefit is exempt if the total loans from the company to Jane do not exceed £10,000 throughout the tax year. Here the loan exceeds £10,000, so the exemption does not apply.
Tax and NIC. The benefit is subject to income tax as employment income. Jane is a higher-rate taxpayer, so tax at 40% is due: £1,372.19 × 40% = £548.88. The benefit is also subject to Class 1A NICs, which are payable by the employer (Alpha Ltd), not by Jane. The Class 1A rate for 2024/25 is 13.8%. The company must report the benefit on form P11D by 6 July 2025 and pay Class 1A NICs by 22 July 2025 (or 19 July if paid by post). Jane must include the benefit on her self-assessment return for 2024/25.