An employer providing loans to employees or their relatives has certain National Insurance and reporting obligations.
In many cases, making loans to employees or their relatives can create an obligation to report beneficial loans to HMRC. The deemed benefit would be a taxable benefit in kind for the relevant employee; this would increase the employer’s Class 1A NIC bill at the end of the tax year.
However, certain loans are exempt from this reporting obligation. These may include loans employers provide:
- in the normal course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee)
- with a combined outstanding value to an employee of less than £10,000 throughout the whole tax year
- to an employee for a fixed and never changing period, and at a fixed and constant rate that was equal to or higher than HMRC’s official interest rate when the loan was taken out. The official rate for 2016-17 was 3%
- under identical terms and conditions to the general public as well (this mostly applies to commercial lenders)
- that are ‘qualifying loans’, meaning all of the interest qualifies for tax relief.
- using a director’s loan account, as long as it’s not overdrawn at any time during the tax year.
Loans written off also create a National Insurance Class 1 charge. Employers must be report these on a P11D, and have an obligation to deduct and pay Class 1 NIC on the deemed value of the benefit.
Calculating the taxable benefits for chargeable loans can be complex and technical guidance is available on the HMRC website. However, it is always best to take professional advice if you are unsure of your tax/NIC responsibilities. If you would like the advice of our experienced team on 01785 248 939 for advice or email [email protected].