Employee loan

 

 

loan

 

What is an employee loan?

Some employers offer their employees low interest or interest-free loans.  Such loans are not liable to PAYE tax, but may be taxable as a benefit under Part 3, Chapter 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) if the loan is more than £10,000.00 during the tax year.

HMRC regards such loans as a benefit of employment, and calls them beneficial loans. The benefit is the difference between the interest that you pay (if any) and the commercial rate that you would have paid if you had got the loan somewhere else. HMRC has special rules related to such loans which can be found in EIM26100: The Benefits Code – Beneficial Loans 

The rules on beneficial loans apply only to an employment-related loan which is a taxable cheap loan. An employment-related loan is a loan made to an employee, or a relative of an employee, which is made by one of the following;-

  1.  The employee’s employer or a prospective employer (except where the employer is an individual who makes the loan to a relative).
  2. A company or partnership which is controlled by the employer, or by which the employer is controlled, or under the same control as the employer.
  3. A person having a material interest in a close company or in another company or partnership controlling that close company and the employee’s employer is that close company, or controls it, or is controlled by it.

Loans to employee shareholders

Employers may lend their employees up to £10,000 with no tax consequences, unless the employee is also a shareholder in the company, in which case there could be other tax points to consider. Issues arise where a company lends money to enable employees to acquire shares in that company or a group company. This is known as “financial assistance”. If the loans are made by a public company, then this financial assistance is unlawful unless it falls within certain limited exceptions. Loans by private companies are allowed except where the loan is given for acquiring shares in its parent company and that parent company is a public company.

Private companies can use loans or credit arrangements as part of their employee share plans or other special employee incentive arrangements. This is done by making a loan to an employee;

  • to fund the acquisition of shares in the company or its parent company
  • acquire shares from an employee benefit trust (EBT)
  • or pay the exercise price for share options

The HMRC manual Employee Share Schemes User Manual (ESSUM) has guidance on loans to employee shareholders

 

Tax Treatment 

Under Sections 175(1) and (2) ITEPA 2003 (and subject to the exceptions summarised in HMRC Manual EIM26132) a chargeable benefit arises when an employment-related loan is provided to an employee (except an employee in excluded employment – EIM20007).

A taxable cheap loan is an employment-related loan

  • which is outstanding for all or part of the year in which the employee is in employment, and
  • no interest is paid on the loan, or the interest paid is less than is due at the official rate of interest (EIM26104) , and
  • none of the exceptions in sections 176-179 ITEPA applies (EIM26132).

Short-term loans and advances

A short-term loan or advance is usually made with no income tax or class 1 national insurance deducted. The full amount of gross salary is taxed,  national insurance is deducted and the advance is deducted from net pay on the next pay day.

 

Loans released or written off

Under Section 62 ITEPA 2003, the release or writing off of an employee loan is taxable as earnings for the year the loan is written off – EIM01490

 

 Loans without tax liability

EIM26132 lists the types of loans where there would be no tax liability. Loans below £10,000 a year are not regarded as a taxable benefit, so only loans of more than £10,000.00 will attract tax. This limit applies to the total of all loans made to you by your employer and applies throughout the tax year. A loan may not be taxable where you are able to show that you got no benefit from a loan made to your relative. For example, if you employ your daughter in your personal business and lend her money to buy a new car, it is probable that this would be regarded as a domestic loan made because of your family relationship and not because of the employment relationship. A loan may be considered a ‘qualifying loan’ where the loan would have fully qualified for tax relief if you had actually paid the interest.

Interest

HMRC assume the rate of interest on the loan should be 3.25% (since 6 April 2014) if your loan is more than £10,000.00.  If you don’t pay any interest, or you pay interest at a lower rate, the difference between the interest at the HMRC rate and the amount that you actually pay is subject to income tax. Your employer must report the beneficial loan on an annual form P11D and you will need to include the benefit on your annual self-assessment tax return.

 

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Best of the web

HMRC Manual EIM26100 : The Benefits Code – Beneficial Loans

Loans provided to employees

Tax on benefits in kind

HMRC Manual – Employee Share Schemes Manual

 

 

Disclaimer 

This resource is published by Employee Rescue Limited. Please note that the information and any commentary on the law contained herein is provided free of charge for information purposes only. The information and commentary does not, and is not intended to, amount to legal advice. Employee Rescue accepts no responsibility for any loss occasioned to any person acting or refraining from action as a result of the material contained in this update. Further specialist advice should be taken before relying on the contents of this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form without the prior permission of Employee Rescue Ltd.

 

Case Study

In the Scottish case of Collins v First Quench Retailing Ltd [2003], Ms Jacqueline Collins was awarded £179,000 from her employers when the off-license she managed was robbed. Ms Collins had been the manager of Victoria Wine, run by First Quench Retailing, for about ten years. When Mrs Collins started in the shop she had been concerned about security and raised this with management. Since 1977 there had been 13 reported crimes at the shop, including five thefts, one minor assault, one serious assault and one assault with intent to rob. There were two armed robberies in 1994 and four... Read More
Ms Jacqueline Collins was awarded £179,000 from her employers when the off-license she managed was robbed.Collins v First Quench Retailing Ltd
Business, Finance & Law