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Tax consequences of loans to employees

20 December 2023

Employees benefit from employment-related cheap or interest-free loans, known as beneficial loans. Exemptions exist, such as for small loans under £10,000, loans in family relationships, fixed-rate loans meeting HMRC criteria, and qualifying loans with tax-relief eligible interest.

An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference in interest. The difference in interest been that the employee pays and the commercial rate they would pay on a loan elsewhere. We refer to these as beneficial loans.

Employers might not have to report anything to HMRC. Additionally they may not have to pay tax and National Insurance in several scenarios where beneficial loans are exempt. The most common exemption applies to small loans with a combined outstanding value to an employee of less than £10,000 throughout the entire tax year.

The exempt list also includes loans provided:

  • in the normal 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 it was taken out;
  • under identical terms and conditions to the general public as well (this mostly applies to commercial lenders);
  • that are ‘qualifying loans’, meaning all of the interest qualifies for tax relief; and
  • using a director’s credit account as long as it is not overdrawn at any time during the tax year.
Source: HM Revenue & Customs Mon, 18 Dec 2023 00:00:00 +0100

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