An employee can benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the employee’s interest and the commercial rate the employee would have to pay on loan obtained elsewhere. These types of loans are referred to as beneficial loans.
There are several scenarios where beneficial loans are exempt, and employers might not have to report anything to HMRC or pay tax and National Insurance. The most common exemption relates to small loans with a combined outstanding value to an employee of less than £10,000 throughout the tax year.
The list also includes loans provided:
– in the ordinary course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee)
– to an employee for a fixed and invariable period, and at a fixed and invariable rate that was equal to or higher than HMRC’s official interest rate when took out the loan
– under identical terms and conditions to the general public as well (this mainly applies to commercial lenders)
– that are ‘qualifying loans’, meaning all of the interest qualifies for tax relief
– using a director’s loan account as long as it’s not overdrawn during the tax year.
HMRC’s official interest rate is currently 2%.