What is a beneficial loan? What are the tax and Benefit In Kind implications? Which loans are exempt? How is the value of the benefit calculated? How is the beneficial loan reported? What happens if the loan is written off?
This is a freeview ‘At a glance’ guide to beneficial loans. Subscribers, see Loans: Employment-related (beneficial loans) for your guide to this topic.
What is a beneficial loan?
A beneficial loan is a loan provided to an employee (including an officer, such as a director), by their employer, either:
- Interest-free.
- At an interest rate below HMRC’s Official Rate of Interest (ORI).
A beneficial loan can also arise where the loan is provided to an employee by someone other than the employer, such as a:
- Parent/holding company of a group.
- Subsidiary company of the employer company.
- Prospective or future employer.
What are the tax and Benefit In Kind implications?
If the aggregate of all loans outstanding throughout the tax year (6 April to 5 April) exceeds £10,000, the employee may be taxed on the difference between the interest charged by the lender and HMRC's ORI.
Which loans are exempt?
Some loans are exempt. These include where:
- The aggregate value of all loans is £10,000 or less.
- Interest is charged at HMRC’s ORI (or a higher rate than the ORI).
- A loan is provided in the normal course of a domestic or family relationship as an individual (i.e. the loan is not provided in connection with the individual’s employment).
- A loan is made by way of an advance to cover Qualifying business expenditure, subject to certain conditions.
- Loans are provided on the same terms to the general public.
- The loan is a 'qualifying loan' (see below).
- The loan is provided under a Salary sacrifice arrangement.
How is the value of the benefit calculated?
There are two methods for calculating the value of the benefit:
- Average method (this is the most commonly used method).
- Strict method (this requires an election to be made by the taxpayer or HMRC).
Under the average method, the taxable value is calculated by taking the average outstanding loan balance in the tax year and multiplying it by HMRC’s ORI. If the loan is only outstanding for part of the tax year, the value of the benefit is apportioned.
If the employee pays interest, the contributions will reduce the value of the taxable benefit under both calculation methods.
The strict method calculates interest on a daily basis on the exact amounts of the loan outstanding during the tax year.
Example 1:
- Jack’s employer gave him a loan of £30,000 in 2020, and he used the money to buy a car. Jack repaid £5,000 on 5 November 2024.
- Under the average method, Jack's taxable loan benefit for 2024-25 is £618.75: (£30,000 + £25,000)/2 x 2.25%.
- Under the strict method, Jack's taxable loan benefit for 2024-25 is £628.13, being the sum of:
- £30,000 x 7/12 x 2.25% = £393.75
- £25,000 x 5/12 x 2.25% = £234.38
Either HMRC or the taxpayer can insist on the use of the strict basis. It wouldn’t make sense for Jack to elect for the strict basis, as it results in a higher benefit. HMRC would also not insist on the strict method, as the difference in the benefit value is insignificant.
Example 2:
- Taking the above example, but assuming Jack repaid the loan in full on 5 November 2024, Jack's 2024-25 loan benefit using the average method would be: (£30,000 + £30,000)/2 x 7/12 x 2.25% = £393.75
Qualifying loans
If a loan is used for a 'qualifying purpose' (i.e. a purpose for which tax relief will be given), there is an interaction between the two sets of rules.
- If the whole of the loan interest will attract relief, either as a deductible payment under s.383 ITA 2007 onwards or as a trading income or property income deduction, the loan is ignored (i.e. no benefit will arise and no interest relief will be given anywhere else).
Where only part of the loan interest qualifies for tax relief as a deductible payment or deduction from income, the loan cannot be ignored.
- Further calculations will be required to calculate the value of the taxable loan benefit and the interest qualifying for tax relief.
Reporting requirements
- Beneficial loans are reported on form P11D by 6 July following the end of the tax year, unless they are Payrolled.
- Class 1A National Insurance must be paid by the employer on the value of the benefit.
What happens if a loan is written off?
- The amount written off is taxable as earnings and reported on form P11D.
- Class 1 National Insurance (but not PAYE tax) must be deducted through payroll on the value of the benefit.
Loans to participators
A s.455 CTA 2010 tax charge arises when a loan is made to a participator, which remains outstanding more than nine months after the end of the company's accounting period, see Directors' Loan Account Toolkit.
Our Close company loans toolkit (loans to participators) takes a detailed look at the Corporation Tax treatment when a Close Company makes a loan to a participator. It also provides links to our guides for individuals on the making of loans to companies.
Useful guides on this topic
Official rate of interest
What is HMRC's official rate of interest? What does it apply to? What were the past rates?
Exemption for paid and reimbursed expenses
There is an exemption for qualifying business expenses provided that the expenses are incurred personally and then reimbursed by the employer.
Directors' loan accounts: Toolkit (subscribers)
HMRC instructs its staff to examine directors' private expenditure during an enquiry into a close company's books and records. In most cases, the company will be expected to produce a transaction history of any director's loans or current accounts.
Salary sacrifice & optional remuneration schemes (OPRA)
A salary sacrifice scheme is an arrangement made between the employer and the employee. The employee forgoes cash earnings in return for benefits or other forms of non-cash pay.
P11D: Reporting benefits and expenses
Employers have an annual obligation to complete forms P11D in respect of each employee in receipt of taxable employment benefits or expenses.
Payrolling of benefits
From 6 April 2016 employers may voluntarily payroll some or all taxable benefits as an alternative to reporting them on form P11D.
National Insurance: Rates
What are the current National Insurance rates? What rates will apply to next year?
External links
HMRC guidance for loans provided to employees can be found Here
Beneficial loan arrangements: HMRC official rates
Income Tax Act 2007:
s.178 Exception for loans where interest qualifies for tax relief
s.383 Relief for interest payments