QUESTION: An employee of mine over-extended themselves this Christmas and has gotten into a little debt. They have asked for help and I was thinking of making them a loan from my company, but I am not sure of the implications. What do I need to be aware of?
ANSWER: In the UK, providing a loan to an employee can have implications for both the company and the employee. It’s important to be aware of certain limits and tax considerations.
Firstly, there are tax implications for the employee if the loan exceeds £10,000 at any point during the tax year. If the loan exceeds this threshold, the employee may be liable to pay tax on the benefit of the loan, which is calculated based on the official rate of interest set by HM Revenue and Customs (HMRC).
This interest rate is known as the ‘official rate,’ and if the employee pays interest below this rate or no interest at all, they will be taxed on the difference between the interest paid and the official rate. The current official rate of interest is 2.00%
For the company, providing a loan can also have tax consequences. If the loan exceeds £10,000 and is interest-free or has an interest rate below the official rate, the company is required to report this to HMRC on a P11D form.
The company will then have to pay Class 1A National Insurance contributions on the value of the benefit. Currently the rate of Class 1A NIC is 13.8%. Class 1A NIC’s are reported and paid through the P11D(b) form, due by 19 July following the end of the tax year.
It’s crucial for both the company and the employee to keep detailed records of the loan agreement, including the amount, terms, and any interest charged. This documentation is essential for compliance and reporting purposes.
Regarding notification to HMRC, it’s not mandatory for the company to inform HMRC when providing a loan to an employee. However, as mentioned, if the loan exceeds £10,000 or if it’s interest-free or has a low-interest rate, the relevant reporting and tax obligations come into play.
It’s advisable to ensure that the terms of the loan comply with HMRC regulations and that both parties are aware of the tax implications. Seeking professional advice to structure the loan appropriately can help navigate these complexities and ensure compliance with tax laws.
In summary, while there are no strict limits on providing loans to employees, exceeding the £10,000 threshold can trigger tax implications for both the employee and the company. Detailed documentation and adherence to HMRC guidelines are essential, and seeking professional advice is recommended to navigate the specific circumstances of your company and employee.
:: Feargal McCormack (f.mccormack@fpmaab.com) is partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies
