Are there tax implications of making a loan to an employee?

Businesses with spare cash are increasingly helping out their employees with short-term loans, especially due to the cost of living increases. If you are thinking of doing so, here are the things you need to know.

Benefit in kind

If you do not charge interest, or you charge interest at a low rate, there may be a benefit in kind assessable on the employee as they are deemed to have had a ‘cheap loan’. It arises as follows:

The difference between the loan interest paid to you and HMRC’s Official Rate of Interest is the value of the benefit in kind, currently, it is 2% for 2022-23.

The employee will pay tax on the value of the difference and you as the employer will pay Class 1A Employer’s National Insurance at 15.05% on the same amount.

This only arises on loans in excess of £10,000. Any loan below this amount does not create a benefit in kind.

Loans to participators

An additional tax implication can arise for limited companies. If the employee is a participator or an associate of a participator, and the company is a close company then HMRC may charge a tax commonly known as section 455 tax to the company. Here are the definitions:

  • A close company is broadly a company controlled by up to five individuals.
  • A participator is most often a shareholder of the company.
  • Associates are generally relatives of or partners of the participator.

So a company lending money to a shareholder’s daughter would be caught by these rules.

The s455 tax is equivalent to 33.75% of the loan which has not been repaid within 9 months of the year-end in which it arose. The company has to pay this by its normal due date for Corporation Tax.

S455 tax is ultimately refundable once the loan has been repaid, but the company will have to wait until the normal due date for the Corporation Tax for the year in which repayment has occurred before the refund can be applied for.

This is not an annual tax charge so if the loan amount does not increase, then there is no additional tax.

Disclaimer.

This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated to us.

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