Repaying a director's loan account with dividends: is it worth accelerating the payment?

S.455 charge

If a director shareholder owes their company money which is not repaid within nine months following the end of the company’s accounting period in which the debt arose, it’s liable to a special tax. This is known as a s.455 charge and currently equates to 32.5% of the debt owed after the nine months is up. The charge is a temporary one and HMRC repays the s.455 charge after the end of the accounting period in which the debt is repaid. The debt can be cleared wholly or partly by the company declaring a dividend which it sets against the amount owed rather than paying it to the director shareholder. This method has advantages over other ways of clearing a debt.

Higher tax rates for dividends

The bad news is that from 6 April 2022 the tax rates which apply to dividends will increase as shown by the table below.

Income tax band	Up to 5 April 2022	From 6 April 2022
Basic dividend rate	7.5%	8.75%
Higher dividend rate	32.5%	33.75%
Additional dividend rate	38.1%	39.35%

 

If a director is considering declaring a dividend to clear a debt to their company (or for any other reason), it’s worth considering whether to do so before the new higher rates take effect on 6 April 2022.

Disadvantages to early dividends

Naturally, avoiding the new higher tax rates is sensible, but care needs to be taken to avoid paying a dividend before 6 April 2022 that will push the director into a higher tax bracket.

Example. Gina is the only shareholder and director of Acom Ltd. During its current financial year, which ends on 31 December 2021, Gina borrows £20,000 from Acom. She plans to repay this by declaring a dividend at the end of September 2022. That’s in the 2022/23 tax year when the higher tax rates apply. If she declares the dividend on or before 6 April 2022 the lower tax rates will apply. However, as she expects her taxable income for 2021/22 to be £45,000, adding a dividend of £20,000 will push her into the higher rates so that almost £15,000 will be taxed at 32.5% rather than potentially 8.75% if it was paid on or after 6 April 2022, i.e. in 2022/23. It would seem she might be worse off by declaring the dividend sooner.

Delaying a dividend until 2022/23 might also push Gina’s income for that year into the higher rate band for which the 33.75% tax applies. If so she should consider declaring some dividends in 2021/22 and some in 2022/23 to make full use of her basic rate band in both years.

Director's should leave declaring extra dividends before 6 April 2022 until they can reasonably accurately estimate their taxable income for 2021/22. And they should try to declare an amount that won’t inflate their taxable income to the point that it pushes them into a higher tax bracket than would otherwise apply.