Tax treatment of loans to employees

Employees may receive a taxable benefit where an employer provides a loan that is interest-free or charged at a rate below HMRC’s official interest rate (currently 3.75%). The benefit arises from the difference between any interest actually paid by the employee and the interest that would have been charged by a commercial lender.

These arrangements are commonly referred to as beneficial loans. In many cases, the value of the benefit is subject to Income Tax and National Insurance, and employers may need to report it to HMRC.

However, a number of exemptions can apply so that no tax charge or reporting requirement arises. One of the most common is where the total outstanding balance of loans to an employee does not exceed £10,000 at any point during the tax year.

Other exempt situations include:

• loans made in the normal course of a domestic or family relationship, where the loan is made by an individual (and not by a company they control);
• loans provided on terms where both the interest rate and repayment period are fixed and the interest rate is at or above HMRC’s official rate when the loan is taken out;
• loans offered on the same terms and conditions to the general public, typically by commercial lenders;
• loans that are “qualifying loans” for tax relief purposes, where all of the interest is eligible for tax relief; and
• loans made through a director’s loan account, provided the account is not overdrawn at any point during the tax year.

Where an exemption applies, no taxable benefit arises and there is generally no requirement for the employer to report the loan to HMRC.