Changes to Directors Loans from April 2016

With effect from 6th April 2016, there will be an increase in the tax charged on overdrawn directors accounts according to the 2016 Budget announcement.Anti-avoidance rules have been in place for a number of years to prevent “close companies” (companies controlled by fewer than six parties) and companies owned entirely by directors from paying loans to shareholders and directors to avoid tax  on salary or dividend takings. Any debt still owing to the company 9 months after the year end triggers a tax charge equal to 25% of the loan balance. This is known more commonly as the s.455 tax. The charge is similar to a withholding tax in that it can be repaid to the company – However, it can only be repaid 9 months after the year end in which the loan was also repaid. Therefore there is a minimum cashflow gap of at least a year.

Within the 2016 Budget, from 6th April 2016 this s.455 tax charge increases to 32.5%. The new rate only applies to loans made after the 6th April 2016.

Contact us to see how this affects you, particularly if you rely on a regular month draw from your business that is often the form of a loan. There could be action that you need to take now to minimise the impact on your business.