Some employers offer their employees low interest or interest-free loans. This page provides information on the different types of loans that employers may make and their tax treatment. Contents include loans to employee shareholders, short-term loans and advances, loans without tax liability, those that are written off and interest.
What Is an Employee Loan?
Employee loans are not liable to PAYE tax, but may be taxable as a benefit under Part 3, Chapter 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) if the loan is more than £10,000.00 during the tax year.
HMRC regards such loans as a benefit of employment, and calls them beneficial loans. The benefit is the difference between the interest that you pay (if any) and the commercial rate that you would have paid if you had got the loan somewhere else. HMRC has special rules related to such loans which can be found in EIM26100: The Benefits Code – Beneficial Loans
The rules on beneficial loans apply only to an employment-related loan which is a taxable cheap loan. An employment-related loan is a loan made to an employee, or a relative of an employee, which is made by one of the following;-
- The employee’s employer or a prospective employer (except where the employer is an individual who makes the loan to a relative).
- A company or partnership which is controlled by the employer, or by which the employer is controlled, or under the same control as the employer.
- A person having a material interest in a close company or in another company or partnership controlling that close company and the employee’s employer is that close company, or controls it, or is controlled by it.
Loans to Employee Shareholders
Employers may lend their employees up to £10,000 with no tax consequences, unless the employee is also a shareholder in the company, in which case there could be other tax points to consider. Issues arise where a company lends money to enable employees to acquire shares in that company or a group company. This is known as “financial assistance”. If the loans are made by a public company, then this financial assistance is unlawful unless it falls within certain limited exceptions. Loans by private companies are allowed except where the loan is given for acquiring shares in its parent company and that parent company is a public company.
Private companies can use loans or credit arrangements as part of their employee share plans or other special employee incentive arrangements. This is done by making a loan to an employee;
- to fund the acquisition of shares in the company or its parent company
- acquire shares from an employee benefit trust (EBT)
- or pay the exercise price for share options
The HMRC manual Employee Share Schemes User Manual (ESSUM) has guidance on loans to employee shareholders
Tax Treatment
Under Sections 175(1) and (2) ITEPA 2003 (and subject to the exceptions summarised in HMRC Manual EIM26132) a chargeable benefit arises when an employment-related loan is provided to an employee (except an employee in excluded employment – EIM20007).
A taxable cheap loan is an employment-related loan
- which is outstanding for all or part of the year in which the employee is in employment, and
- no interest is paid on the loan, or the interest paid is less than is due at the official rate of interest (EIM26104) , and
- none of the exceptions in sections 176-179 ITEPA applies (EIM26132).
Short-term Loans and Advances
A short-term loan or advance is usually made with no income tax or class 1 national insurance deducted. The full amount of gross salary is taxed, national insurance is deducted and the advance is deducted from net pay on the next payday.
Loans Released or Written Off
Under Section 62 ITEPA 2003, the release or writing off of an employee loan is taxable as earnings for the year the loan is written off – EIM01490
Loans Without Tax Liability
EIM26132 lists the types of loans where there would be no tax liability. Loans below £10,000 a year are not regarded as a taxable benefit, so only loans of more than £10,000.00 will attract tax. This limit applies to the total of all loans made to you by your employer and applies throughout the tax year. A loan may not be taxable where you are able to show that you got no benefit from a loan made to your relative. For example, if you employ your daughter in your personal business and lend her money to buy a new car, it is probable that this would be regarded as a domestic loan made because of your family relationship and not because of the employment relationship. A loan may be considered a ‘qualifying loan’ where the loan would have fully qualified for tax relief if you had actually paid the interest.
Interest
HMRC assumes the rate of interest on the loan should be 3.25% (since 6 April 2014) if your loan is more than £10,000.00. If you don’t pay any interest, or you pay interest at a lower rate, the difference between the interest at the HMRC rate and the amount that you actually pay is subject to income tax. Your employer must report the beneficial loan on an annual form P11D and you will need to include the benefit on your annual self-assessment tax return.
Best of the Web
HMRC – The Benefits Code – Beneficial Loans
GOV.UK – Loans provided to employees
HMRC Manual – Employee Share Schemes Manual
Last Updated: [31/08/2021]
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