Beneficial loan arrangements

18 Feb Beneficial loan arrangements

An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.

The official rate of interest on beneficial loan arrangements will remain the same as last year at 3% with effect from 6 April 2016. A change in the rate is only made in the event of significant changes in interest rates. An employee can also benefit if an employment-related loan is released or written off. He or she is then no longer obliged to repay the amount that was lent.

A benefit in kind will be applicable where a loan is provided at an interest rate of less than 3%. In addition employers must also pay Class 1A National Insurance premiums. There are a number of exempt activities where a beneficial loan might not need to be reported to HMRC. The most common is where the combined outstanding loan value to an employee is less than £10,000 throughout the whole tax year.

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