QUESTION: One of my employees has asked for a short-term loan to allow them to undertake some work on their property. I assume it is okay for me to lend them the money through the company?
ANSWER: Providing a loan to an employee in the UK can be a helpful way to support them during financial difficulties, but it’s essential to understand the potential implications for both the company and the employee.
There are potential tax implications for the employee if the loan exceeds £10,000 at any point during the tax year as the employee may be liable for tax on the benefit of the loan. This is calculated based on the difference between the interest rate the employee pays (if any) and the official rate of interest set by HM Revenue and Customs (HMRC).
Currently the official rate of interest is 2.25%. If the loan provided to the employee is interest-free or charged at an interest rate below the official rate, then the employee will be taxed on the difference as a benefit-in-kind. The benefit-in-kind is reported on the employee’s P11D form, and the tax liability will be calculated accordingly.
For the company, offering an employee a loan may also trigger some tax obligations. If the loan exceeds £10,000, or if it is provided interest-free or at a rate below the official rate of interest, the company must report this on a P11D form as mentioned previously.
The company is also required to pay Class 1A NIC on the value of the taxable benefit. The current rate for Class 1A NIC is 13.8% and this is reported and paid via the P11D(b) form, which must be submitted by July 19 following the end of the tax year.
There are several things that you can do to reduce the administrative burden attached to the loan and to avoid any disputes with the employee.
- Have a formal loan agreement in place and maintain detailed records to include the loan amount, duration of the loan and the repayment schedule.
- Keep the loan below the £10,000 threshold as loans below this do not create a taxable benefit.
- If the loan exceeds the £10,000 threshold, then charging the official rate of interest avoids additional tax obligations for the employee or filing requirements for the company.
It is not mandatory to notify HMRC when providing a loan unless it exceeds the £10,000 threshold or qualifies as a taxable benefit. However, if the loan triggers a benefit-in-kind, it must be reported on the employee’s P11D form, and the company must pay Class 1A NIC via the P11D(b) form.
Offering a loan to an employee can be a supportive gesture, but exceeding the £10,000 threshold or offering loans at an interest rate below the official rate can lead to tax and reporting obligations for both the employee and the company.
The key considerations to bear in mind are understanding the tax implications for loans above £10,000, complying with HMRC reporting requirements and paying Class 1A NIC if applicable, keeping detailed records of the loan agreement and repayments, and structuring the loan to avoid unnecessary complications.
By taking these steps and seeking professional guidance, you can help your employee responsibly while ensuring compliance with tax laws and minimising administrative burdens.
Shane Martin (shane.martin@aabgroup.com) is tax director at AAB Group Accountants (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
