18 April 2023
When an employee or director receives a loan from their employer, this can represent a taxable benefit if it is considered a cheap or interest-free loan. Cheap for this purpose means that the interest rate charged by the employer on the loan is below the official rate of interest set by government.
In the 2022/23 tax year, HMRC’s official rate of interest on such ‘beneficial loans’ was 2.0%. This is the rate that applies to beneficial loans in order to calculate the taxable benefit being provided to the employee or director. So, for example, where a loan (in excess of £10,000) is provided by a company to an employee or director, a taxable benefit arises if the interest rate charged is less than the official rate of interest. Therefore, if the director paid interest at a rate of 2.0% for the 2022/23 tax year, no benefit or associated tax liability would ordinarily have arisen for that tax year. Where the loan is provided interest-free they would have a taxable benefit calculated as an annual tax charge on 2.0% of the loan for the 2022/23 tax year.
Given that the Bank of England’s base rate increased to 4.25% in March 2023, those with outstanding beneficial loans may have been worried about the potential hike in HMRC’s official rate of interest from 6 April. Many should however be able to rest easy as from 6 April 2023, HMRC’s official rate of interest increases by a modest 0.25%, from 2.0% to 2.25% per annum.
Indeed, many lenders will offer rates on unsecured loans at a higher rate than this and a loan with a 2.25% interest rate could look very attractive. Even if no interest is charged, a 45% tax rate on 2.25% of the loan could still be more attractive.
Having such a low beneficial loan rate could mean that where the director is also a shareholder, the company might consider a loan instead of a dividend which would be taxed at up to 39.35%. For example, it may be possible for a director to take a £20,000 loan from the company and invest this in an ISA with a higher rate of return. They could potentially benefit from a tax-free income on the difference in rates.
However, it would need to be recognised that this is a loan and so would need to be repaid at some point and until then the annual income tax charge would be incurred. Furthermore, there are additional tax consequences for the company where loans are made to shareholders and the loan remains unpaid for more than nine months after the end of the company's accounting period, and so the individual may want to repay the loan by this date. If the loan remains outstanding then the company would have a tax liability of 33.75% of the loan balance; but this is repaid to the company when the loan is repaid.
At a time of generally gloomy news for taxpayers this April, this may represent surprisingly positive news for taxpayers.