Cheap employer loans - a surprising gift courtesy of HMRC

28 May 2024

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:

 The number of individuals with Section 175 ITEPA taxable loans, by band and year, 2018/19 to 2022/23
   Number of individuals
 Loan band (£)  2018/19   2019/20    2020/21   2021/22  2022/23 
 10,000 to 19,999.99  869  955  903  883  895
 20,000 to 29,999.99  287  283  272  195  247
 30,000 to 39,999.99  104 118   112  90  108
 40,000 to 49,999.99  40  54  49  61  55
 50,000 to 99,999.99   80  83  85  81  80
 Over 100,000   52  50  40  32  44

Based on this information, it appears that during the tax year ended 5 April 2023 only 44 individuals across the UK had taxable loans from their employer where the loan had exceeded £100,000, while 1,385 individuals had loans below £100,000. 
One might have expected the number of individuals with larger loans from their employer to be higher and it seems a bit peculiar for interest rates to be offered by the government’s UK Treasury Gilts at a much higher rate than HMRC’s ORI.
However, there is of course risk involved with taking finance from your employer, even if you happen to be the controlling shareholder in that employing company. For example, should the business get into difficulty then a liquidator could seek a repayment of that loan at short notice.
There can also be other tax consequences for the company, with a corporation tax liability of 33.75% of the loan due in certain circumstances. That is typically repaid by HMRC once the loan is repaid but it could present a challenge for the cash flow of the business. Taxpayers are also at the mercy of HMRC setting the interest rate and there may be scope for that to increase in the future.
So, whilst it seems there is an apparent opportunity for some to take loans from their employers and that surprisingly few are availing themselves of this, there are important risks to be considered before doing so.

Miruna Constantin
Manager, Private Client Services
Miruna Constantin
Manager, Private Client Services