Whilst a business is perfectly entitled to loan money to employees or relatives, there can be tax implications if it does. Here’s our brief reminder of those implications.
As an employer providing loans to your employees or their relatives, you have certain National Insurance and reporting obligations. The term employee also includes directors.
There are different rules for:
The employer has 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 employee.
The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere.
Loans written off also create a class 1 NIC charge for the employee. They must be reported on a P11D and the employer must deduct and pay the NIC from the employee’s salary, on the amount written off for tax purposes.
A director’s loan is when a director get money from their company that is not either a salary, dividend or expense repayment or money they have previously paid into or loaned the company.
Tax may be due on director’s loans and personal and company tax responsibilities depend on how the loan is settled. Calculating the taxes due for directors’ loans can be complex and it’s advisable to take advice to make sure tax and NIC responsibilities are fulfilled.
Not all loans create a tax problem, and for certain loans you might not have to report anything to HMRC or pay tax and NI.
These include loans employers provide: