January 26th, 2015 / Insight posted in The Sunday Times Business Doctor

Tax cost of giving loans to employees

LC writes: I have a longstanding employee who is looking to buy a new flat. His lender requires a larger deposit and he has approached me for a loan. I am concerned that, if he can’t buy the property, he might move further away and find another job. Can the company provide such a loan?

Many companies provide employee loans for things such as travel season tickets, so it is feasible to do so and there is no stipulation on what the money has to be used for, writes Jon Dawson, partner at Kingston Smith LLP. Inevitably, there are tax consequences for the company and the employee.

The main concern is that the loan could be a benefit in kind. A loan is a benefit if it has no interest or a rate of interest below the taxman’s official rate, currently 3.25%. Total loans under £10,000 at any point in a tax year are, however, exempt. For loans above £10,000, the company will have to charge the minimum rate of interest or report it as a benefit in kind on a P11D form, subject to Class 1A national insurance. The benefit is based on the value of the underpaid interest.

If your employee owns any shares in the company or is related to a shareholder, a further tax liability could arise for the company. A relation would be a spouse, parent, child, sibling or partner. For cumulative loans over £15,000, the company will be liable to pay 25% corporation tax on the loan balance that remains outstanding nine months after the company year end. This is refundable when the loan is repaid. With regard to your employee, you can ignore shareholdings under 5%.

If you were to write off the loan in future, the company and employee would both pay national insurance. The amount written off would need to be declared as a benefit on a P11D form.

It is important to make a loan agreement with your employee to protect the company’s interest. You should also agree a salary deduction for the repayments.