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Discounted Loan Rates for Employees

As part of my employee benefits package, my employers have offered me a mortgage at a discounted rate. However they have mentioned I will have to pay tax on this, is this correct and if so how it is a benefit to me?

Unfortunately it is correct. If an employer provides an employee with a subsidised loan, the employee will be assessed to a benefit in kind on the difference between the interest rate actually charged and what is known as the “official rate” of interest.  The employee will then pay income tax (20% if you are a basic rate taxpayer, 40% if you are a higher rate taxpayer) on the value of the benefit received each year, so it is still more beneficial to take up the low interest loan you have been offered.

At present the “official rate” is 4.75% for the period from March 2009, but you should be aware that this rate is kept under review and may be subject to change.  If you paid interest of, say, 2.5% on £60,000, you would be paying £1,500 a year in interest.  The official rate of interest at 4.75% would be £2,850, so you would be taxed on a benefit of £1,350, being the difference between the two amounts.

Despite being charged tax on the benefit of having the low interest loan, you would not be liable to make any National Insurance Contributions, as your employer would be liable to pay these direct at the end of the tax year using form P11d(b).

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