A Simple Guide to the Section 455 Tax Charge: What Small Business Owners Need to Know

In this blog we are going to be talking about a little thing called the Section 455 Corporation Tax Charge. It’s a bit of a mouthful, we know, but it’s super important for small businesses in the UK, especially those run by contractors and freelancers. Don’t worry, we’ll break it down into bite-sized pieces, so it’s easy to understand.

What on Earth is the Section 455 Charge?

In simple terms, the Section 455 charge is a tax on loans that a company gives to its directors or shareholders. Imagine you’re a director and you borrow some cash from your company. If you don’t pay back that loan quickly enough, the company might have to cough up some extra tax. That’s the Section 455 charge in a nutshell.

When Does This Tax Kick In?

This tax comes into play when a loan isn’t paid back within nine months and a day after the company’s accounting period ends. So, let’s say your company’s accounting year wraps up on December 31st. If you borrowed money any time during that year and haven’t paid it back by October 1st of the next year, the taxman could come knocking.

How Much Are We Talking About?

The tax is 33.75% of loaned amounts made on or after 6 April 2022. It might sound scary, but remember, it’s not an extra cost. Think of it as a kind of ‘late fee’. If you pay back the loan, the company gets the tax back. So, it’s more of a nudge to pay back the loan on time.

What’s the Fine Print?

When the loan is paid back, the company can reclaim the tax. But watch out for a sneaky move called ‘bed and breakfasting’. This is when a loan is paid back just before the end of the accounting period and then taken out again straight away. The tax guys are wise to this one and have rules to stop it from happening.

Wrapping Up

So, the Section 455 Corporation Tax Charge is all about making sure company directors and shareholders don’t treat the company like a personal piggy bank. It’s a reminder that company money and personal money need to stay separate. As a small business owner, understanding this tax can help you keep your company’s finances shipshape.

Just remember, this guide is a start, but it’s always a good idea to have a chat with your accountant to make sure you’ve got everything covered.

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