Sarah Laing looks at how employers can help staff by providing tax-free loans to employees.
As announced in the 2013 Budget, from 6 April 2014 the exemption limit on benefit-in-kind loans will double from its current level of £5,000 to £10,000. This means that where an employer provides an employee with an interest-free loan, no taxable benefit-in-kind will arise 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 £10,000 at any time in the tax year.
As long as the total outstanding balances on all such loans do not exceed the threshold at any time in a tax year, there will be no tax charge.
Example – Employer-provided interest-free loan
In May 2014, Lenny (a higher-rate (40%) taxpayer) needs to renew his annual season ticket to travel to work, which costs £8,200. To pay for this out of his take-home pay he would need to earn gross pay of £14,138 (i.e. £14,138 less tax at 40% (£5,655) and Class 1 National Insurance contributions (NICs) at 2% (£283) equals £8,200).
If his employer gives him an interest-free loan of £8,200 to enable him to buy the season ticket, it only costs him the £8,200 he borrows and subsequently repays to his employer. Providing the total of all beneficial loans made to him by his employer is less than £10,000, no taxable benefit arises, so the cost of the benefit is nil.
In addition, since the loan is not salary, his employer will not have to pay secondary Class 1 NICs on the amount borrowed.
Individual loans
No taxable benefit arises in respect of loans, however large, if the loan is made by an individual and it can be shown that it was made in the normal course of his/her domestic, family or personal relationships (for example, where the owners of a business make a loan to a son or daughter). HMRC are, however, likely to take a close look at cases where such a claim is made.
Tax advisers dealing with the employer will probably wish to liaise with staff dealing with the business accounts of that employer before agreeing that this exemption applies. If the loan is shown as an asset in the accounts of the employer’s business, HMRC will be less inclined to accept that this was made in the course of a private relationship.
This exemption can only apply where the lender is an individual. It cannot, therefore, apply where a loan is made by a company, even where that company is controlled by somebody with the relevant personal relationship. However, certain loans can be chargeable under the employment-related loan rules where they are made by an individual having a material interest in a close company. In these cases, where the loan is made by the individual with the material interest, the exemption for loans made in the course of personal relationships can still be available.
Similarly, no tax charge can arise if an employee is able to demonstrate that he has derived no benefit from a loan made to a relative of his. This exemption applies to the charge in respect of a loan and also applies where a debt is released or written off.
Loans to directors
Loans to directors are prohibited under the Companies Act 2006, though loans not exceeding £10,000 are permitted and larger loans may now be made with approval of the members.
Practical Tip:
From April 2014, employers can offer employees a tax-free cheap loan of up to £10,000 per year. Provided the full amount of the loan is repaid to the employer and total loans outstanding do not exceed £10,000 at any time, no tax or NIC will be payable. It is worthwhile talking to your employer about interest-free or cheap loans as it may be beneficial to you both.
