Tax issues on the provision of loans to employees or directors
Tax issues on the provision of loans to employees or directors

The following Tax guidance note provides comprehensive and up to date legal information covering:

  • Tax issues on the provision of loans to employees or directors
  • No section 62 charge on provision of a loan but potential charge on release or write-off of loan
  • Employment-related loans within the benefits code
  • Charge on benefit of taxable cheap loan
  • The normal method of calculating the benefit
  • The alternative method of calculating the benefit
  • Interest actually paid on the loan
  • Exemptions from benefits charge
  • National Insurance contributions and reporting obligations

Companies sometimes provide directors or employees with low interest (or interest-free) loans as part of the reward package or on specific occasions to help the individual meet significant expenditure.

As with any other kind of employment reward, if the loan is provided by a third party, rather than the employer, the disguised remuneration provisions in Part 7A of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) should be considered first, as those rules take priority over most of the other rules for taxing employment income (including the benefits code). For more details, see: Disguised remuneration and EBTs—overview.

If there is no third party (eg because the loan is advanced by the employer itself), or one of the exemptions from the disguised remuneration rules applies, then the rules in the benefits code on employment-related loans described below may apply to the relevant loan.

Broadly, where an employee or director (or a relative of his) is provided with an employment-related loan that is a taxable cheap loan, an income tax charge and class 1A National Insurance contributions (NICs) arise annually on the cash equivalent of the benefit to the employee or director (subject to certain exceptions).

This Practice Note explains when this annual charge arises and how it is calculated.

For details of what constitutes an employment-related loan, see Practice Note: Employment-related loans—defined.

A further income tax and