Loans to Employees

If an employee or director receives a loan from their employer, two potential tax liabilities are triggered: one for the employee and one for the employer. Whether these tax charges are chargeable depends on a number of issues.

Employees or directors
1. A tax charge will usually apply to interest free and low-interest loans provided to directors and to employees earning more than £8,500 per year by reason of their employment.
2. A benefit in kind charge will apply if interest charged by the employer is less than the official rate, currently 4%.
3. This benefit charge will not apply if the loan is less than £5,000.
4. Loans supplied for certain purposes are excluded from the charge.

The employer’s position

  1. 1. If a benefit in kind charge arises under 2 above, the employer will be liable to pay Class 1A National Insurance based on the amount of the benefit.
  2. If loans are made to directors who are also shareholders and the balance is outstanding at the end of the company's accounting year, a potential liability to Corporation Tax is triggered.

Company tax charge on outstanding loans to shareholders

There are three possible scenarios:

  1. 1. The director's loan account is paid off by the last day of the company's accounting period. In this scenario there is no Corporation Tax due on the loan and it is not necessary to include details of the loan on the company tax return.
  2. 2. The director's loan account is paid off within nine months and one day of the end of your company's accounting period. In this scenario, there is also no corporation tax due on the loan. However, the company must include details of the loan on the company tax return.
  3. 3. The director's loan account is not paid off within nine months and one day of the company's year-end. When an overdrawn director's account is outstanding, the company will be required to pay a Corporation Tax charge at 25% of the outstanding loan balance.

This additional tax can be recovered when the loan is repaid.

Disclaimer – Please note: The ideas shared with you in this article are intended to inform rather than advise. Taxpayers’ circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

For more information contact Nigel Holmes on 01228 690200 or email nigel.holmes@armstrongwatson.co.uk
 

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