Tax-free loans to employees
Employees can obtain a tax-free benefit when provided with an employment-related cheap or interest-free loan. The most common is where the combined outstanding loan value to an employee is less than £10,000 throughout a tax year.
The benefit is calculated as the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.
A change in the rate is only made in the event of significant changes in interest rates. An employee can also benefit if an employment-related loan is released or written off. He or she is then no longer obliged to repay the amount that was lent.
A benefit in kind will be applicable where a loan is provided at an interest rate of less than 3%. In addition, employers must pay Class 1A National Insurance premiums based on any benefit assessed. There are a number of exempt activities where a beneficial loan does not need to be reported to HMRC. The most common is where, as noted above, the combined outstanding loan value to an employee is less than £10,000 throughout a tax year.
Planning note: In these days of increasing personal debt, and much subject to interest rates far in excess of 3%, employers who have resources available can provide these loans as part of an incentive package for key staff. We can help assess the various tax and financial risks involved if you would like to explore this strategy for your business.