Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
What happens if you provide loans to your employees?
If you are an employer who provides loans to your employees, or to their relatives, then you will be expected to report these loans to HMRC and there may be additional tax and National Insurance to pay as a result of them. The rules differ depending on the kind of loan you provide to your employee.
As far as HMRC are concerned, these loans fall into 3 different categories:
- ‘beneficial loans’ which are provided interest-free or at an interest rate below the official interest rate used by HMRC
- Loan accounts provided to company directors, where they are able to charge personal bills to the loan account to be picked up by the company
- Loans which you write off.
With regard to ‘beneficial loans’, these rules cover any loans which were arranged, advanced, facilitated or taken over from another party by yourself (as the employer), or a company or partnership you control. They also cover such loans that were taken over by a company or partnership which controls your company or business or by a person with a material interest in your business (such as a company director).
Are there any exemptions?
There are some types of ‘beneficial loan’ which are exempt from HMRC’s reporting rules, meaning that you wouldn’t need to pay tax or National Insurance on them either. By beneficial, HMRC mean that the provision of the loan could be classed as a benefit provided by the employer.
These loans include:
- Loans with a combined outstanding value to an employee of less than £10,000 for the whole tax year
- Loans provided within a domestic or family relationship by you as an individual, rather than as the company controlled by you (even if you are classed as the sole owner and employee)
- Loans provided using a director’s loan account, as long as the account was not overdrawn at any point during the tax year. Where the account becomes overdrawn, or where there is a regular pattern to any withdrawals from the account, HMRC may consider these to be earnings and could potentially raise an enquiry into them, especially if the pattern has existed for more than a year
- Loans provided under the identical terms and conditions as loans provided by yourself to members of the general public, so HMRC are generally referring to commercial lenders with this rule
- Loans classed as ‘qualifying loans’, which means that all of the interest is classed as tax relief. Where only part of the interest would qualify for tax relief, the whole of the loan is no longer classed as exempt and the cash value should be calculated as the whole of the value without any reference to any applicable tax relief
- Loans provided to an employee for a fixed and invariable period and at a fixed and invariable interest rate, which was equal to or higher than HMRC’s official interest rate when the loan was taken out.
If the loan forms part of a salary sacrifice arrangement, you do need to report this to HMRC. This includes loans made to relatives of the employee where they form part of the salary sacrifice arrangement.
How do you report these loans to HMRC?
If the loans aren’t exempt, as listed in the section above, then you do need to report them to HMRC and National Insurance will need to be deducted and paid on the value of the loan.
If the loan is a beneficial loan, you need to report it on your P11D form and pay Class 1A National Insurance on the value of the benefit you have provided to your employee.
If you have written off a loan provided to an employee, this always has to be reported to HMRC without any exceptions. HMRC class these written off loans as earnings. This includes all loans, whether classed as beneficial or not. The loan should be reported on your P11D and Class 1 National Insurance should be deducted and paid on the value of the benefit provided to the employee.
How do you work out the value?
Because it can be complicated to work out the value of a loan provided to an employee, HMRC provides a number of ways to help. You can use the HMRC PAYE Online software, as well as commercial payroll software. You can also work out the value manually – P11D Working Sheet 4 can help you do this.
If the cost of the loan forms part of a salary sacrifice arrangement and the amount of salary given up is greater than the cost of the loan, you need to report the salary amount on the P11D form instead. This only applies to salary sacrifice arrangements made after 6th April 2017.
How can DSR Tax Claims help?
We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful. Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.