If your business offers low- or no-interest loans to employees, or provides living accommodation, there’s an important tax rule you need to know about: the official rate of interest.
This rate is set by HMRC and is used to calculate taxable benefits. And from April 2025, the way it’s handled is changing.
Here’s what you need to know—explained simply and clearly.
What Is the Official Rate of Interest?
The official rate of interest is set by HMRC and is used in two key situations:
- To calculate the taxable benefit on cheap or interest-free employment-related loans
- To work out the additional tax on employer-provided living accommodation that costs over £75,000
If you’re a business owner offering these perks, this rate directly affects how much tax your employees—or possibly you as a director—will pay.
How It Works for Employment-Related Loans
Let’s say your business provides a loan to an employee (or director) with little or no interest.
If the interest paid by the employee is less than HMRC’s official rate, the difference is taxed as a benefit in kind.
There are two ways to calculate the benefit:
- Average method: Based on the average loan balance across the year (or loan period)
- Precise method: Based on the actual loan balance for each day of the tax year
So, if no interest is paid at all, the employee is taxed as if they had paid interest at the official rate on the full balance.
How It Works for Employer-Provided Living Accommodation
If your business provides accommodation and it cost more than £75,000, the official rate of interest also comes into play.
Here’s how:
- First, HMRC calculates a base benefit using the property’s annual value or the rent paid by the employer
- Then, if the cost (or market value) exceeds £75,000, an additional yearly rent is added
- This extra rent is worked out using the official rate of interest, multiplied by the value over £75,000
So, a more expensive property means a higher taxable benefit—especially if interest rates rise.
What’s Changing from April 2025?
Here’s the big news: HMRC will now review the official rate of interest quarterly, rather than fixing it for the entire tax year.
Key points:
- From 6 April 2025, the rate will no longer remain fixed throughout the year
- The rate will be reviewed every three months
- It could increase, decrease or stay the same, depending on interest trends
- This change is meant to keep the official rate more closely aligned with real-world rates
For 2025/26, the starting official rate of interest will be 3.75%.
Why This Matters for Business Owners and Employees
Until now, a fixed annual rate gave businesses and employees certainty when calculating taxable benefits.
But from 2025/26 onwards, in-year changes could make things more complex—especially when managing benefit-in-kind reporting for:
- Director or staff loans
- Company-provided housing
There’s now the risk of fluctuating tax bills, especially if interest rates climb.
If you provide these benefits or are thinking about offering them, it’s more important than ever to keep an eye on the official rate—and understand how changes could affect your payroll or personal tax.
Need Help Managing Employment-Related Benefits?
Tax on loans and accommodation can be a tricky area, especially with the new rules for 2025/26.
Whether you’re a business owner offering benefits or a director using one yourself, we’re here to help you stay compliant—and avoid any unexpected tax surprises.
Speak to Jon or the team today to find out how the changes might affect you, and how to keep things running smoothly.
Get in touch now and let’s plan ahead.
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Any questions?
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