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).
By Jo Nockels
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.