Cheap employer loans - a surprising gift courtesy of HMRC

Back in April, some taxpayers will have been happily surprised that HMRC confirmed the ‘official rate of interest’ (ORI) for the 2024/25 tax year remained at a very low rate of 2.25%, when compared to the Bank of England’s (BoE) base rate of 5.25%. The methodology and thinking behind maintaining the ORI at this level remains unclear.

In our previous article on the matter, we commented on the Treasury missing out on opportunities to have either benefitted from larger tax receipts on benefits in kind with a higher ORI or potentially tax of up to 39.35% on dividends used to repay those loans. On the other hand, this could be good news for taxpayers that are thinking about taking larger loans from their employers, potentially encouraging some to use such funds to invest personally or consolidate more expensive third-party debt.  

Given the differential in interest rates, we submitted a freedom of information request to HMRC to confirm how many individuals had chargeable benefits shown on their P11D forms in relation to ‘taxable cheap loans’. 

As outlined in HMRC’s guidance on the subject, a taxable benefit like this can arise where there is a loan to an employee from an employer at some point during the tax year, no interest is paid (or interest is paid at a rate lower than the ORI, and that various exemptions do not apply. For example, one such exemption is that no taxable benefit arises when the loan is lower than £10,000 throughout the tax year.

The response to this freedom of information request was slightly surprising, as follows: