Employers will be able to help staff with tax-free loans of up to £10,000 for items such as travel season tickets, after the Chancellor announced in the 2013 Budget that the exemption limit on benefit-in-kind loans would be doubled from April 2014.
Currently, no taxable benefit-in-kind arises on interest-free loans
where:
·
the loan has been made on commercial terms
by employers who lend to the general public; or
·
the total of all beneficial loans made to
an employee does not exceed £5,000 at any time in the tax year.
From 6 April 2014, the £5,000 exemption will rise to £10,000.
Cheap loans
Cheap loans provided by employers, which do not involve the payment of
interest, are taxed in the same way as conventional employee loans, i.e. on the
difference between the interest (or its equivalent) payable by the employee and
the amount of interest that would be payable at the ‘official rate’. For
2013/14, the official rate is 4%.
There are two ways of calculating the taxable benefit:
• the averaging
method; and
• the alternative
method.
The averaging method will usually apply unless the taxpayer elects for,
or HMRC specifically require, the alternative method to be used. Where the loan
is not at the same level throughout the tax year, it may make a significant
difference if one or other method is used.
Averaging method
To calculate any tax charge using the normal method, the following
steps should be followed:
Step 1
Find the balance of the loan outstanding on 5 April, or on the day on
which the loan was made.
Step 2
Find the balance on 5 April at the end of the tax year. If the loan was
fully repaid during the year, it is necessary to look at the balance on the day
of repayment.
Step 3
Calculate the average of the two figures from Steps 1 and 2 above.
Step 4
Calculate the average official rate of interest (if the official rate
of interest was unchanged for the whole year, or for the part of the year
during which the loan was outstanding, this step can be ignored).
Step 5
Apply this average loan figure to the average ‘official rate of
interest’ in force during the period for which the loan was outstanding during
the year using the formula:
A x I x M/12
A = average loan as calculated above;
I = average interest rate as calculated above;
M = number of whole months during which the loan was outstanding in the
year.
Step 6
Deduct any interest paid by the employee.
Alternative method
This precise method considers the amount of loan outstanding each day
and is calculated as follows:
Step 1
For each day in the tax year, multiply the maximum outstanding amount
of the loan by the official rate of interest in force on that day.
Step 2
Add together those daily amounts.
Step 3
Divide the result by the number of days in the tax year.
Step 4
Deduct any interest paid by the employee.
Practical Tip :
Employers can offer employees a tax-free cheap loan of up to £5,000 per
year. Provided the full amount of the loan is repaid to the employer and total
loans outstanding do not exceed £5,000 at any time, no tax or NIC will be
payable. This limit is due to rise to £10,000 in April 2014.
Sarah Laing
