Loans to employees – what you need to know

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.

The rules

There are different rules for:

  • providing ‘beneficial loans’, which are interest-free, or at a rate below HMRC’s official interest rate
  • providing loans which are subsequently written off
  • charging a director’s personal bills to their business loan account (i.e. the directors’ loan account)

Beneficial loans

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 which are written off

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.

Director’s loan account

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.

What loans are exempt?

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:

  • 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,
  • under identical terms and conditions as those provided to the public as well (this mostly applies to commercial lenders),
  • that are ‘qualifying loans’, meaning all the interest charged to the loan account qualifies for tax relief.

This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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