Employer Providing Cash Loans to Staff

Where an employee is given an interest free or reduced interest rate loan from their employer, a benefit in kind charge will arise.  The charge is calculated based on the difference between any interest paid by the employee and the 'official rate' of interest used by HM Revenue & Customs.  The current 'official rate' is 4.75% and this usually reviewed each year in the Chancellor's Budget statement.

If you are given a loan of £8,000 at a reduced rate of interest of 2%, you will pay interest of £160 per year. Using the 'official rate' a loan of £8,000 should attract an annual interest charge of £380.  You would then be taxed on a benefit in kind value of £220, being the difference between the amount actually paid and the amount that would be charged at the 'official rate'.

Tax will be charged on the benefit in kind at your marginal rate of tax, so if you are a higher rate taxpayer at 50%, you will have to pay tax of £110, a 40% taxpayer will have a liability of £88 and a basic rate taxpayer will have a liability of £44.  The banafit in kind will be reported to HM Revenue & Customs on the employer year end form P11D, a copy fo which will be given to you.  In addition, your employer will also need to pay Class 1A National Insurance at 12.8% on the value of the benefit.

Date published 5 Dec 2012

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.