Given the current difficult economic climate, an employee may want to approach their employer for financial assistance in the form of a loan. It is worthy of note that an employee can benefit from the loan being disregarded in the light of the rule on beneficial loans for income tax and NIC purposes.
Under the strict letter of the law, a tax charge will arise where a director or employee obtains a benefit by reason of their employment when they (or any of their relatives), is given a cheap or interest-free loan. The tax charge generally arises on the difference between interest at the appropriate 'official rate' (currently 2.25%) and the interest, if any, actually paid. Such loans are called beneficial loans.
However, as long as a few conditions are satisfied, and the total amount outstanding on all loans from an employer to an employee does not exceed £10,000 at any time in the tax year, then the loans are ignored for the purposes of the rules on beneficial loans for both income tax and national insurance contributions purposes.
No taxable benefit-in-kind will arise where:
- the loan has been made on commercial terms by employers who lend to the general public; or
- the total of all loans made to an employee does not exceed £10,000 at any time in the tax year
It is important to remember that this is an ‘all or nothing’ exception. If, however briefly, the loan balance rises above £10,000 at any time in the tax year, then the exception will not be available, and the benefit-in-kind will be taxed in full.
Further information can be found on the government’s website here.
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