Employer Providing Cash Loans to Staff

My employers have offered me a temporary loan at a discounted rate to help me buy a new car to get to work. Are there any tax implications that I should be aware of if I choose to accept this rather generous offer?

1st May 2010

Where an employee is given an interest free or reduced interest rate loan from their employer, a benefit in kind charge will arise.  The charge is calculated based on the difference between any interest paid by the employee and the 'official rate' of interest used by HM Revenue & Customs.  The current 'official rate' is 4.75% and this usually reviewed each year in the Chancellor's Budget statement.

If you are given a loan of £8,000 at a reduced rate of interest of 2%, you will pay interest of £160 per year. Using the 'official rate' a loan of £8,000 should attract an annual interest charge of £380.  You would then be taxed on a benefit in kind value of £220, being the difference between the amount actually paid and the amount that would be charged at the 'official rate'.

Tax will be charged on the benefit in kind at your marginal rate of tax, so if you are a higher rate taxpayer at 50%, you will have to pay tax of £110, a 40% taxpayer will have a liability of £88 and a basic rate taxpayer will have a liability of £44.  The banafit in kind will be reported to HM Revenue & Customs on the employer year end form P11D, a copy fo which will be given to you.  In addition, your employer will also need to pay Class 1A National Insurance at 12.8% on the value of the benefit.

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.

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