Employer Loans - The Taxable Benefit Explained

It may sound like a strange idea for an employee to ask an employer for a loan but depending on the relationship that they have with them and the employer's attitude on the subject, they may wish to help in this way. This is often the case with highly-valued employees of long-standing who may be struggling to meet their mortgage commitments or have some other urgent need for financial assistance but cannot get help through more traditional means. 

Issues Around Employee Loans

Employers are able to lend their employees up to £10,000 with no tax implications. This is obviously a lot of money for an employer to loan to an employee and care should be taken on the employer's part when offering this service to an employee. The employers must bear in mind their fiduciary duties and only offer the loan if they have reason to be confident that it will be paid back in full, rather than be defaulted upon.

The stance in terms of tax implications changes somewhat where an employee is also a shareholder in the company as this would be considered a “close company loan”. This can lead to a corporation tax charge if the loans are outstanding more than nine months after the company's accounting period.

Issues can also arise if the employee is given a loan so that they are able to buy shares in the company, as in some circumstances this could be seen as the company using its resources unfairly assisting one side in a potential struggle for ownership. 

Tax Free Income

The previous tax-free loan limit for employer loans was 5,000 up to tax year 2013/14. Where employer loans total more than £10,000 at any point during the tax year, they are considered a taxable benefit in kind. Anything up to this limit, however, is tax-free.

Taxable Benefit

If the loans exceed £10,000, and become a taxable benefit, this means that the employee is liable to pay UK Income Tax and National Insurance Contributions (NICs) on the difference between any interest actually paid and interest calculated at the official rate of 2%.

In practice, this means that if an employee borrowed £20,000 and was asked to pay 1% interest by the company, they would have to pay UK Income Tax and NICs on the £200 difference between the amount of tax (1%) they were paying and the 2% official rate.

Lawrence Grant Accountants

If you are still struggling to make sense of the rules surrounding employer to employee loans, we are here to help. We are an accountancy firm with many international clients, from small businesses to large conglomerates and we value your business.

We know that dealing with issues such as these can be a nuisance for many businesses who just want to get on with their work. Contact us by telephone on 0208 8617575 or via email on be-ambitious@lawrencegrant.co.uk and allow us to take the pain out of your accountancy work,