Beneficial employee loans

21 March 2023      Julia Ascott, Employment Taxes Specialist

HMRC have updated their Beneficial loan arrangements — HMRC official rates guidance to include the official rates of interest up to 2023, for use on your end of year taxable benefits reporting requirements.

What is a beneficial loan?

A beneficial loan is a loan made by an employer to their employee which is either interest free or low interest (lower than the official rate of interest.

When is a beneficial loan taxable?

A beneficial loan becomes taxable where, at any point in the tax year, the total amount of all outstanding loans (between employer and employee) exceeds £10,000.

How is the tax calculated?

There are two methods of calculating the tax due on a beneficial loan, the averaging method or the precise method. The averaging method must be used unless you have elected (and HMRC have confirmed) using the precise method.

Averaging method: take the total amount of loans outstanding at the start of the year (or when the loan was made if later) and at the end of the tax year (or when the loan was repaid if early) and multiply by the official average rate of interest. In the 2022/23 tax year, the average official rate of interest was 2%.

An alternative to the averaging method is the exact/precise method which requires HMRC approval before use. This method is typically used where there have been large fluctuations in the loan value or where larger sums are involved at the start/end of the tax year, thus using the averaging method would be less representative.

Reporting beneficial loans

Taxable beneficial loans must be reported to HMRC on an annual basis, using the employee’s form P11D. The employee would be taxable on the official rate of interest of their outstanding loan (not the amount of loan outstanding).

For more information on beneficial loans, read Chapter 7 of Booklet 480, which dedicates a whole chapter to it.

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