Loans provided to employees

Employers sometimes provide their employees with low interest (or interest-free) loans either as part of the reward package or on special occasions to help the individual meet significant expenditure.

Remember that, as with any other kind of employment reward, if the loan is provided by a third party rather than the employer, it is worth considering whether the disguised remuneration provisions in ITEPA 2003, ss 554A–554Z21 (Pt 7A) apply, as those rules have priority over most of the other rules for taxing employment income. If there is no third party, or one of the exemptions from ITEPA 2003, ss 554A–554Z21 (Pt 7A) applies, then the normal rules as described below apply. The rules are discussed in detail in the Disguised remuneration ― overview guidance note.

When an employer lends money to an employee at an interest rate lower than the official rate of interest (ORI) set by HMRC, the interest the employee should have paid is a taxable benefit.

To be taxable on the employee, the loan must have been provided ‘by reason of employment’. A benefit provided to a an employee’s relative is chargeable on the employee (unless that relative is also an employee, see EIM20505). Note that the extension is different to the extension to ‘members of the employee’s family’ (or family and household) that applies to other types of employee benefit. It includes:

• a)the employee’s spouse or civil partner
• b)the employee’s children, parent or remoter relation in the direct line (grandchildren, grandparents etc)
• c)the employee’s brother or sisters
• d)the spouse or civil partner of anyone in (b) or (c)

The chart in the attached pdf illustrates the meaning of relative for this purpose.

Click here to view pdf