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Tax Free Loans

Posted: 19th Sep 2014 by Robert Salenius Taxation

Tax free loans – what do you need to know?

It is possible for an employer to make a loan to an employee at a beneficial rate of interest or even at zero interest. When this happens it is called a beneficial loan and there maybe tax consequences for the employee receiving the loan if the interest paid is lower than a rate prescribed by HM Revenue and Customs (HMRC) which for 2014/15 is 3.25%.

The amount chargeable is called the cash equivalent of the benefit of the loan. This is the difference between:

  • the interest which would have been payable if the borrower had been required to pay interest on the loan at the appropriate official rate (or rates) for the tax year concerned and
  • the amount of interest actually paid by the borrower for the same tax year.

If, however, the combined outstanding value of the loans to an employee from 6th April 2014 to 5th April 2015 is less than £10,000 throughout the whole tax year then there is no requirement to report the loan to HMRC and no tax or NIC to be paid.

It is possible for an employer to supply these loans to some or all employees to help with expenses such as travel season tickets and it may be a useful, if not taxable, benefit of employment.

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