Loans provided to Employees
A loan provided to an employee from an employer is not earned income; the sum paid to the employee is expected to be repaid in full to the employerâ€™s company, most likely from the net pay of the employeeâ€™s wages as an agreed salary sacrifice arrangement. These loans are called beneficial loans and they can be arranged by the employer or a company the employer controls, by a company that controls the employing business or by someone else who has a material interest in the company.
The loan must usually be reported to HMRC, often on a P11D, and National Insurance will be calculated to be paid by the business unless certain criteria apply. It is important to be aware of the rules when giving employees cash benefits as even if it may not be called a loan between the employer and employee, in HMRCâ€™s eyes it may be classed as such and will require treatment as appropriate.A loan is classed as â€˜exemptâ€™ if it meets the following criteria:
â€¢ The loan is made to family or friends from the employer as an individual, and not as the company.
â€¢ The total value of the loans to an employee did not exceed Â£10,000 in the tax year.
â€¢ If the loan was agreed to be repaid within a period, and at a fixed rate that is equal to or higher than HMRCâ€™s official rate of interest when the loan was first paid to the employee. From the 6th April 2017 this rate has been 2.5%.
â€¢ If all the interest qualifies for tax relief. This is a qualifying loan and has its own rules on accounting for these.
â€¢ If a directorâ€™s loan account is used to make the loan and this does not go overdrawn, i.e. shows that the director owes the company money.
This means that the loan may not required to be reported to HMRC, and that there may be no tax or national insurance to pay on the loan. Where the repayment is part of a salary sacrifice arrangement formed after the 6th April 2017, a report will need to be made to HMRC regardless of the above points. Where salary sacrifice is made, it is important that the employeeâ€™s cash earnings do not go below the minimum wage allowance and the arrangement must be agreed upon between the employer and employee; the employeeâ€™s contract should be amended as necessary to be clear on the benefits.
If the loan is written off by the employer and thus it is no longer expected to be repaid by the employee the remainder of the loan becomes treatable as taxable earnings and must be reported to HMRC so that PAYE tax and national insurance can be paid. Loans must be reported on P11Ds after the tax year and submitted to HMRC by the following 6th July. If an interest-free or low interest loan was drawn out by the employee, the value of the benefit can be worked out using the P11D Working Sheet 4 document.Tags:
PAYE, Benefits in Kind, Company Loans, Loans, Company Benefits, Employee Benefits