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
- 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.
- A benefit in kind charge will apply if interest charged by the employer is less than the official rate, currently 4%.
- This benefit charge will not apply if the loan is less than £5,000.
The employers’ position
- 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.
- If loans are made to directors 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
There are three possible scenarios.
- 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.
- 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.
- 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 after the loan has been repaid.
If you have any queries regarding loans made to directors or employees, please give me a call.
John Elliott – Tax Partner