Director's Loan Account and the Section 455 Charge
Kestrel Analytics Ltd is a small owner-managed company with a 31 March year end. In November 2024 the sole director, Priya, drew £95,000 from the company to fund a personal property deposit. The amount was posted to her director's loan account and no interest was charged. She repaid £40,000 in February 2025 and the remaining £55,000 in August 2025. Separately, the company paid a £12,000 life assurance premium on a policy where the company is the beneficiary. Priya also has a £6,000 interest-free loan to an employee, Ravi, made in June 2024, of which £2,000 was outstanding at 5 April 2025. The company's taxable trading profit before these items is £210,000. Priya takes a modest salary and no dividends.
1. Quantify the s.455 charge exposure and explain when it crystallises and how repayment affects it.
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The s.455 charge applies to outstanding director's loans at the end of the accounting period (31 March 2025), not the date of drawdown.
- Drawn Nov 2024: £95,000
- Repaid Feb 2025: £40,000
- Outstanding at 31 March 2025: £55,000
The August 2025 repayment is after the period end and does not reduce the charge for FY2024. The charge is 33.75% of the outstanding balance: £55,000 × 33.75% = £18,562.50, payable via the CT600A and due with the corporation tax (nine months and one day after the period end, i.e. 1 January 2026).
When the £55,000 is repaid in August 2025, the s.455 liability is relieved (a repayment claim), but relief is only given if the loan is repaid before the end of the accounting period following the one in which it arose - here by 31 March 2027, so August 2025 is comfortably within the window.
Note also that the loan must be reported on the CT600A and, if over £10,000, on the P11D as a beneficial loan unless interest at the official rate is charged.
2. Assess the treatment of the life assurance premium and the employee loan, and state the resulting corporation tax and benefit-in-kind consequences.
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Life assurance premium: Where the company is the beneficiary, the premium is not a deductible trading expense - it is capital in nature (an investment in an insurance policy) and is added back in the corporation tax computation. So the £12,000 is disallowed.
Employee loan to Ravi: £6,000 made in June 2024; £2,000 outstanding at 5 April 2025. Because the loan exceeds £10,000 at any point? No - the peak was £6,000, below the £10,000 threshold, so no P11D beneficial loan benefit arises. There is also no s.455 charge because Ravi is an employee, not a participator (s.455 applies to loans to participators and their associates).
Corporation tax: Taxable profit = £210,000 + £12,000 disallowed premium = £222,000. No deduction for the loan to Priya (it is a balance sheet item, not an expense). Corporation tax at 25% (profits above £250,000? No - between £50,000 and £250,000, so marginal relief applies). The company pays at the main rate less marginal relief, giving an effective rate between 19% and 25%.
3. If Priya instead took the £95,000 as a dividend, what would change and what would you advise?
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A dividend requires distributable reserves. The company must have sufficient retained profits - here taxable profit of £210,000 less corporation tax leaves adequate reserves, but this must be verified from the accounts, not the tax computation.
A dividend of £95,000 would be taxed on Priya at dividend rates (8.75%/33.75%/39.35%) after her £500 dividend allowance, with no NIC. Compared with the loan route:
- The loan route defers tax but triggers the 33.75% s.455 charge (£18,562.50) unless repaid.
- The dividend route triggers immediate income tax but no repayment obligation and no s.455 charge.
Advice: If Priya genuinely intends to repay, the loan route is cash-flow efficient (the s.455 charge is refundable on repayment). If she does not intend to repay, a dividend is cleaner and avoids the s.455 charge and the beneficial loan benefit. She should also consider the interaction with her salary and the £50,270 higher-rate threshold. Document the decision and the board minutes.