Tax-exempt employee loans

Beneficial loans, where employees benefit from cheap or interest-free loans from their employer, can trigger tax implications. However, certain exemptions, like loans under £10,000 or qualifying loans, eliminate the need for employers to report or pay tax on them.

An employee can receive a benefit when they are provided with a loan from their employer that is either cheap or interest-free. The benefit arises from the difference between the interest the employee pays, if any, and the market rate they would have to pay if they obtained a loan from another source. These types of loans are commonly referred to as beneficial loans.

However, there are several situations in which beneficial loans may be exempt, meaning employers don’t have to report anything to HMRC or pay tax and National Insurance. One of the most common exemptions applies to small loans where the total outstanding balance to the employee is less than £10,000 throughout the entire tax year.

Other exemptions include:

• Loans given in the normal course of a domestic or family relationship, where the loan is made by an individual (not a company they control, even if they are the sole owner and employee).
• Loans provided to an employee for a fixed, invariable period, with a fixed, invariable interest rate that is equal to or greater than HMRC’s official interest rate when the loan was taken out.
• Loans offered on the same terms and conditions to the general public, typically seen with commercial lenders.
• Loans that are ‘qualifying loans’ for tax relief, meaning all the interest is eligible for tax relief.
• Loans made through a director’s loan account, as long as the account is not overdrawn at any point during the tax year.

In these cases, no tax or reporting requirements would apply to the employer.