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 loan charge. The rate of that tax is tied to the higher dividend tax rate. Therefore, it will increase to 33.75% for a loan charge arising on or after 1 April 2022.

Tip. HMRC repays the loan charge 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 loan 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.