Exempt beneficial loans

An employer may offer a cheap or interest-free loan to an employee. For example to cover the purchase of a season ticket, to meet welfare expenses or in the case of financial hardship. An employee loan (which for taxable benefit purposes includes any form of credit) gives to an employee with the expectation. That the amount is to repaid in full to the employer. Often via a pre-agreed deduction from the employee’s net salary. 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. If they exceed a certain limit during the tax year.

An employee can obtain a benefit when provide with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays if any. The commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are refer to as beneficial loans.

There are a number of scenarios where beneficial loans are exempt. Employers might not have to report anything to HMRC or pay tax and National Insurance. The most common exemption relates to small loans with a combine outstanding value to an employee of less than £10,000 throughout the whole tax year. 

The 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. At a fixed and invariable rate that was equal to or higher than HMRC’s official interest rate when the loan 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. 
• using a director’s loan account as long as it’s not overdrawn at any time during the tax year.