A beneficial loan is made by your company to someone it either employs or will employ in the near future where the loan is not repaid in full at the employee’s next payday.
Generally, beneficial loans to employees are made with no interest payable or at a rate of interest which is lower than that prescribed by HMRC.
The current rate is 2.5%. You can see a breakdown of the historical rates applied by HMRC by clicking here.
Ultimately, whether you make loans to members of your staff is a policy decision for you and your board.
The generally perceived advantages of offering loans to employees are:
- by being seen to want to help a member of staff in some financial difficulties, you increase the loyalty of that member of staff to the business,
- severe financial worries can have a strong negative bearing on the quality of work that a staff member carries out for you, and
- if the staff member turns to a Wonga-type payday lender or, worse still, an illegal doorstep lender, this injection of cash may provide temporary respite from their financial worries however, when it comes to repaying the loan, the stress the staff member suffers may be degrees worse because of the amount they have to repay.
Arguments against offering loans to employees are:
- there is little to no chance of recovery of the loan if large enough if the staff member suddenly disappears,
- if you know that the staff member spends his or her money on frivolous or destructive activities (for example, alcohol or illegal drugs), your loan may be supporting their habit, and
- if one person gets a loan, many more may come forward and it will be difficult to turn them down, even if the company is suffering from cash flow issues.
If the beneficial loan you make to your employee is less than £10,000, the loan is not treated as a taxable benefit.
This £10,000 limit applies to all loans made over the course of the financial year. If you make three loans of £3,000 to your staff member over the year, it is not a taxable benefit. However, a fourth loan of £1,001 or more would mean that the entire sum of the loans during the year would become a taxable benefit.
Once the amount lent to your employee exceeds £10,000, the loans are now taxable.
The amount of tax will be due on the difference between what your employee paid (or did not pay) in interest and the amount of interest they would have paid had they borrowed the money at HMRC’s rate (currently 3%).
If this is the case, you’ll have to complete a form P11D Working Sheet 4
In any loan agreement, beneficial or not, always make sure you get them to sign a document authorising deductions from their salary.
The more detailed the agreement is, specifically when it comes to how much will be taken from the employee’s wage packet and on what date, the better. Without this evidence, if your employee leaves or is fired, you may be open to a claim of unlawful deduction from wages.
If you lend money to an employee where the employee will make full repayment on the next pay run, there is usually no tax liability to worry about for either you or your staff member.
As with a beneficial loan, always ensure that you have a signed agreement from your employee that the full amount will be deducted from their following wages payment.
If HMRC perceives that a particular staff member is receiving too many loans, then they may insist that the way your employee is paid is reclassified.
For example, if you pay a staff member monthly and they ask every month for a short-term loan or advance, HMRC may insist that you change that staff member over from receiving pay once a month to receiving pay twice a month.
You can choose to write any type of loan to any employee off, whether the loan was beneficial or not.
If this happens, add the remaining amount of the loan to your employee’s gross pay in the current pay period. Your employee will pay more tax than normal on this payrun and you will be faced with a higher National Insurance Employers’ Contribution for that member of staff on the same payrun.
Try to resist writing off the loan in the event that an employee is fired or resigns. If that employee decides to take your company to a Tribunal and wins, you can deduct the remaining loan amount off against any award that they receive.
A loan of £10,001 and above may not be taxable if your company lends the money to someone related to you. HMRC will generally view this as a domestic loan because the loan was made on the basis that the borrower was a son, daughter, brother, sister, and so on.
Different rules apply to loans of any size from a company to an employee who is also a shareholder.
If the money is borrowed is so that your staff members can buy shares in your company (or your group company), this is considered as financial assistance. This is fine if your company (or group company) is a private limited company. Special rules govern public limited companies and we would advise you to seek advice from both Panthera and from your solicitor.
Loaning money to employees (with the exception of short-term loans) can be complicated. If an employee has asked for the company to lend them money, please call us today on 01235 768 561 or email firstname.lastname@example.org for more information.