If a company makes loans to its employees (including directors) there may be tax consequences. The same may also apply to loans extended to their family members. For example, the employer will have an obligation to report a beneficial loan to HMRC (and pay Class 1A NIC) and the deemed benefit would be a taxable benefit in kind for the relevant employee.
A beneficial loan is one that is interest free or the rate charged is below the “official rate” and the benefit is the difference between these interest rate charges.
Fortunately, not all loans create a tax problem, certain loans are exempt from this reporting obligation. These could include loans employers provided:
- in the normal course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee),
- with a combined outstanding balance due from an employee of less than £10,000 throughout the whole tax year,
- to an employee for a fixed and never changing period, and at a fixed and constant rate that was equal to or higher than HMRC’s official interest rate when the loan was taken out – the current rate is 2.5%,
- under identical terms and conditions as those provided to the public (this mostly applies to commercial lenders),
- that are ‘qualifying loans’, meaning all the interest charged to the loan account qualifies for tax relief.
Loans written off will also create a National Insurance Class 1 charge for the employee. They must be reported on a P11D and the employer has an obligation to deduct and pay Class 1 NIC, from the employee’s salary, on the amount written off for tax purposes.
And finally, loans by a company to its directors or shareholders may create additional corporation tax charges.
If you are contemplating loans to employees (or director/shareholders) or have current loans outstanding can we suggest that we undertake a review to ensure any tax consequences are minimised.