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Employee Loans Tax Treatment UK

Company and employer loans provided to employees will be subject to HMRC taxation and reporting rules. Check what is exempt, what you must report and pay, and how to work out the value on beneficial loans.

Employers Providing Loans to Employees

Some National Insurance obligations fall on any employer who provides a loan to an employee. Even though the rules differ, tax treatment would apply any time an employer:

Provides a 'beneficial loan' arrangement at a rate less than HMRC official rates of interest (or interest-free).
Provides a loan to an employee (or their relative) that they later write off.
Charges personal bills of a director to their loan account in the company.

Beneficial Loans HMRC

Tax and reporting rules on employee loans can be complex. But, they cover all beneficial loans that have either been arranged, advanced, guaranteed, facilitated, or taken over from someone else... by:

The employer (or a company or partnership that you control as the employer).
A company or a partnership that controls the business of the employer.
A person with a 'material interest' in the business

Note: The technical guidance explains how to approach complicated situations (details below). An example would be an employer using third-party arrangements to make a loan to an employee.

Employee Loan Exemptions and Reporting

Some kinds of beneficial loans do not need reporting to HM Revenue and Customs. Neither would you need to pay tax or National Insurance on them. But, to qualify as an employee loan exemption, you must provide it:

As part of a normal course of a domestic or family relationship as an individual. It must not be undertaken by a company that you control (even as the sole owner and employee).
With a combined outstanding value less than £10,000 throughout the full tax year to any employee. Note that the threshold was £5,000 for the 2013 to 2014 tax year.
For a fixed and an invariable period. It must also be loaned at a fixed and invariable rate equal to (or higher than) HMRC official interest rate at the time the loan was first arranged.
According to identical terms and conditions as for the general public (applies most to commercial lenders).
Using a 'director's loan account' providing it does not go overdrawn at any time during the tax year.
As a 'qualifying loan', meaning all the interest qualifies for tax relief. The technical guidance section explains this in more detail.

Employee Salary Sacrifice Agreement

An employee loan, or one made to any of their relatives, would need reporting to HM Revenue and Customs if it was part of a salary sacrifice arrangement.

Reporting Costs and Paying HMRC

You would need to report the costs of any loans that are not exempt to HMRC. As a rule, you would also need to deduct or pay National Insurance on them.

Beneficial Loans

The majority of employer advances meet the conditions of a beneficial loan. If you, as an employer or company, provide a loan of this kind to your employee you must:

Submit form P11D to tell HMRC about the arrangement by reporting and paying expenses and benefits.
Work out the value of the benefit (see below) and then pay Class 1A National Insurance on the amount.

Written Off Loans

You must report and pay on all loans you write off for employees. This rule applies no matter whether they got classed as beneficial loans or not. Thus, after writing off the employee loan you would need to:

Submit form P11D to tell HMRC about the arrangement by reporting and paying expenses and benefits.
Deduct and pay Class 1 National Insurance on the value of the benefit. You would not need to deduct PAYE tax.

Working Out the Value of a Loan

There are several ways to work out the value of loans for taxes. You can use HMRC PAYE Online for employers or use commercial payroll software. Use the P11D working sheet 4 to make manual calculations.

Salary Sacrifice Arrangements

You should report the employee's salary amount instead if the cost of the actual loan is less than the total amount of salary given up.

Note: Tax treatment on employee loans differs on this type of arrangement made before the 6th of April 2017. Check further guidance on salary sacrifice for employers.

Employee Loans Technical Guidance

Beneficial loans: contents page
Beneficial loan arrangements (chapter 17 of 'Expenses and benefits: a tax guide')
Class 1 National Insurance: loans written off
Director's loan accounts: overview
Loans released or written off
Making a loan: loan made by third party

Tax Rules on Employee Loans Provided by Employers in United Kingdom
Last Updated 2020