Have you ever heard of a director getting a loan from their own limited company? This might sound awkward but this really is possible in the UK to borrow money as a director from your own company when required. This is indeed not a simple or easy process to initiate, the requirements are quite complicated to complete the process with the required criteria in the UK. This is something to be done very carefully because there is a very low margin for errors. And if mistakes are made, there can be very serious penalties for the director or the admin in this regard. This makes it necessary to have an understanding of the s455 tax rate and how is it relevant to the process.
Moreover, the basic information is imperative to discuss here to have a better understanding of the essential factors. What is the use of the essential factors and how to go about managing the record of details is equally important to carry out the process. In this post we have covered the basics like what are the types of director’s loans, how are directors’ loans useful, what limit amount can I borrow being a director, how will I pay back the borrowed amount, and what is the link of the s455 tax rate. Let us get further in the discussion to gather more information.
What are Two Types of a Director’s Loan?
The basic types of director’s loans are two. The first type of loan is a kind of loan that is received either by the director himself or by any close family member from their own company. This should not be involved with the amount of the director’s salary, dividends, previous loans, or any other expenses. In such a case the director is allowed to get the money borrowed from the sale company that is giving the salary and the number of dividends. This borrowed money must not be consumed with the salary or dividends as this has to be paid back to the company after a certain period of time.
What is the Use of the Director’s Loan Account?
There requires to be a director loan account whenever a director applies to get a loan from their own company. It has to be tracked down in DLA. Some companies have more than one director, in that case, each one of them must own their own director loan account. You will have to ensure that your account stays in credit, this way you will not have to pay any kind of tax on the amount of the loan. An overdrawn director loan account will owe the money to the company on the other hand. Keeping the overdrawn director loan account will trigger the attention of HMRC and they will keep a track of it. It is better to keep your account on zero or in credit.
What is the Limit of the Amount I am Allowed to Borrow as a Director?
Being in the role of director there is no set limit to borrowing the amount of money from your own company in the UK. However, there is a limit to tax-free and taxed amounts of borrowed money in that case. A limit of a certain amount is tax-free. But you will have to ensure that the repayments are done within the period of nine months. Now when you borrowed money is more than a certain limit amount, you will have to deal with a range of liabilities. This involves the class 1 national insurance and benefits in kind. Also during the self-assessment tax returns, the director will have to declare the amount of the loan.
How to Pay Back the Director’s Loan and How is the s455 Tax Rate Relevant?
A certain percentage of corporation tax is applicable if the director is unable to pay the amount of the loan within the duration of nine months and this is known to be the S455. After you are done paying the full money that you have borrowed from your own company, this amount of tax can be claimed back.
This is quite a long procedure. This will make you wait for nine months after the accounting period ends which is related to the clearance of your debt. The set of rules is introduced by HMRC to keep things on track. however, there are many examples where the directors tend to make the repayments of the loan to avoid any such penalties and charges of interest. The directors will normally follow a certain period of nine months normally to immediately withdraw another loan after that for the purpose of recovery or other needs. HMRC considered this to be a tax avoidance technique.
The Bottom Line
Now that we have gathered a fair amount of information about what is s455 tax rate, we can bring the discussion towards wrapping up. There are plenty of benefits of the director’s loan amount that they withdraw from the company. However, there has to be a certain limit to get the tax-free amount because after that you will have to deal with the class 1 national insurance and other such liabilities. This will also make you able to pay the percentage of the interest. Also, ensure to repay the amount of the loan within the period of nine months to avoid penalties and hefty amount of fines. Otherwise, you will not be able to apply for any other loan in the future.
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Disclaimer: All the information provided in this article on tax rates in the UK, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.