Employee loans and the £10,000 threshold

Employee loans

If an employer lends money to an employee or director it can count as a benefit in kind if the loan is interest free or interest is payable at a rate below that set by HMRC (2.25% for 2020/21). The taxable amount of an employee loan is also liable to employers’ Class 1A NI at 13.8%. The taxable amount is calculated on the average balance of the loan over the course of the year.

There’s a separate tax charge if the employer is a company and the loan, however small, is made to a person who owns or controls 5% or more of its share capital, e.g. a director shareholder.

Taxable or not?

The conditions in which an employee loan becomes taxable are:

• the balance exceeds £10,000, ignoring interest unless it’s unpaid and added to the principal
• at any point during the tax year the employee is not required to pay interest at least equal to HMRC’s official rate.

Based on the information given, the bad news for the employter is that because the original loan was for more than £10,000 it counts as a taxable benefit and must be reported to HMRC on Form P11D even though the current and average balance has fallen below that level. However, depending on the full facts the loan might escape the benefit in kind charge.

Non-taxable loan

Loans made in the following circumstances are not taxable benefits in kind:

• those made to an employee who is a member of the employer’s family or household where the employer is an individual;
• those made by an employer whose normal business is or includes the making of loans to the general public and the loan is on similar terms;
• an advance of work expenses of up to £1,000 provided the amount is repaid within six months. Where the balance of the loan ebbs and flows the six-month rules applies to each advance separately; and
• "qualifying" loans, e.g. one used to purchase shares in a close company etc.

Tax, NI and late paid interest

Where an employee is required by their employer to pay interest on a loan to prevent a taxable benefit in kind arising, it might be convenient to calculate the amount payable so that it matches or exceeds the taxable benefit. This is best done after the end of the tax year.

Example. Billy’s employer lent him £11,000 on 1 May 2020. The terms of the loan required Billy to pay interest equal to the HMRC benefit in kind amount. Billy makes repayments on the loan so that the balance is reduced to £8,000 by 5 April 2021. For 2020/21 the interest at HMRC’s rate is £199 (£11,000+£8,000)/2/365x340). As long as Billy pays the £199 to his employer (there’s no time limit for this) there will be no taxable benefit. To avoid the Class 1A NI charge the interest should be repaid no later than 6 July 2021.