Many employers are unaware that they can offer their employees loans. These are tax and interest free and can be up to £10,000 per year.
If the total amount outstanding on all loans from an employer to a single employee does not exceed £10,000 at any time in the tax year, the loans will be ignored for income tax and national insurance purposes.
What are the conditions?
There will be no taxable benefit-in-kind when either:
- The loan has been made on commercial terms by employers that lend to the general public
- The total of all loans to an employee does not exceed £10,000 at any time in the tax year
This is a very strict rule, as if the total rises over £10,000 even briefly, the exception will not be available.
What about individual loans?
If an individual loans money to domestic family or personal relationships, no taxable benefit arises. HMRC are however, likely to take a closer look at cases where a claim is made.
If the loan is shown as an asset in the accounts of the employer’s business, HMRC are unlikely to accept that the loan was made in the course of a private relationship.
This exemption can only apply when the lender is an individual. So, it can’t be applied when the loan is made by a company.
Certain loans can be chargeable under the employment-related loan rules when they are made by an individual that has a material interest in a close company. In these cases, the exemption for loans made in the course of personal relationships can still be available.
In addition, no tax charge arises if the employee is able to demonstrate that he has derived no benefit from a loan that has been made to a relative. This applies to the charge in respect of a loan and also where a debt is released or written off.
Can loans be made to directors?
Loans to directors are generally prohibited under the Companies Act 2006.
However, loans under £10,000 are permitted, and some larger loans may now be made with approval of the members.
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