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Beneficial loans explained

14 February 14 | By: Jas Jhooty

interest

Do you provide loans to staff?

There are a number of circumstances under which an employer may make available a loan to their employees. These could include: -

  • a loan to buy a car
  • a loan for a season ticket
  • an advance of expenses
  • a loan to purchase shares in the company

Whatever the scenario a taxable benefit-in-kind benefit if the employer lends money to their employees and charges interest at less than the official interest rate, (4% for 2013/14 & 3.25% for 2014/15).

There are two main methods of calculation of the arising benefit-in-kind. Employers would normally use the normal averaging method unless requested by HMRC to use the alternative precise method.

Normal averaging method

Step 1

1) Find the maximum amount of the loan outstanding on:

  • 5 April preceding the year of assessment, or
  • if the loan was made during the year, the date on which it was made.

2) Find the maximum amount of the loan outstanding on:

  • 5 April within the year of assessment, or
  • if the loan was repaid during the year, the date on which it was repaid.

3) Add together the maximum amounts found at 1 and 2, and divide the result by two. This is the average loan.

Step 2

Calculate the average official rate of interest for the period covered in Step 1. If the rate changed during the period of the loan:

  1. Multiply each official rate by the number of days when it was in force
  2. Add these figures together and
  3. Divide the result by the number of days in the period.

Step 3

Multiply the average loan (Step 1) by the average official rate of interest (Step 2) and multiply by the number of whole months (a tax month runs from 6th day of one month to the 5th day of the following month) for which the loan was outstanding in the year, then divide the result by twelve.

Alternative precise method of calculation

The normal averaging method works well for steadily decreasing loans over a period of time. However if there is a fluctuating loan (e.g. a director’s loan accounts where the loan balance can increase sharply part way through the year and is brought back down before the end of the year), HMRC or the employer can elect for the alternative precise method of calculation. In this circumstance the actual balance on each day is multiplied by the official interest rate in force on that day. This is the reason why you have to report the maximum balance of each loan on the P11D form.

Small loan exemption

If the combined balance of all loans made available to an employee does not exceed £5,000 at any point in the tax year, there is no need to report a benefit. This limit is being increased to £10,000 with effect from 6th April 2014 so in most circumstances loaning money to an employee for a travel season ticket should be non-taxable.

Reporting loan benefits

Loan benefits are only reportable if the employee is a higher paid employee earning at above the rate of £8,500 per year. A P11D is required to be completed at the end of the tax year. The loan details for each loan made available to the employee needs to be filled in Section H of the P11D. The employer will have to pay Class 1A NIC on the cash equivalents of all loan benefits.

What happens if a loan is written off?

If exceptionally a loan is written off then the amount of the loan outstanding at the date it is written off needs to be reported at Section M of the P11D for tax purposes. However Class 1 NIC is required to be paid via the payroll in the earnings period when the loan is written off.

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