Higher tax rate on directors’ loans

Tax increase

You’re probably aware that the rate of tax payable on dividends will increase with effect from 6 April 2022. The three current dividend rates, 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers, will rise by 1.25% to 8.75%, 33.75% and 39.35% respectively. What you might not be aware of is that there will be a corresponding rise in the tax payable by companies for loans and other credit advanced to “participators” of a close company (a company that’s controlled by five or fewer individuals). Broadly, a participator is someone who controls 5% or more of the share capital.

Loans to participators

Where a participator owes money to their company at the end of its accounting period, any part of the debt which isn’t repaid within the following nine months is liable to a special tax payable by the company known as a s.455 charge. The rate of that tax is tied to the higher dividend tax rate. Therefore, it will increase to 33.75% for s.455 charges arising on or after 1 April 2022.

Tip. HMRC repays s.455 tax nine months after the end of the company’s accounting period in which the amount owing to it is repaid. For example, if a s.455 charge of £10,000 was paid for a company’s accounting period ended on 31 December 2020, and half the debt was repaid in full on 1 March 2021 and the other half on 1 March 2022, HMRC would repay £5,000 on 1 October 2022 and the remainder on 1 October 2023.

The 1.25% tax increase which applies to dividends from 6 April 2022 will also apply to the tax charge payable by companies that are owed money by their participators (shareholders). The rate of tax for this will be 33.75% where the charge arises on or after 1 April 2022.