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If your business makes loans to employees or their relatives this can create tax problems for both employees and employers. And please don’t forget that the term ’employee’ includes directors, and also that loans to family members may be caught.
For example, the employer will have an obligation to report a beneficial loan to HMRC (and pay Class 1A NIC) and the deemed benefit would be a taxable benefit in kind for the relevant employee. A beneficial loan is one that is interest free or the rate charged is below the ‘official rate”’and the benefit is the difference between these interest rate charges.
Fortunately, not all loans create a tax problem, certain loans are exempt from this reporting obligation. These could include loans employers provided:
Loans written off also create a National Insurance Class 1 charge for the employee. They must be reported on a P11D and the employer has an obligation to deduct and pay Class 1 NIC from the employee’s salary, on the amount written off for tax purposes.
Calculating the taxable benefits for chargeable loans to employees can be somewhat complex and readers are advised to take advice if they are unsure of their tax and NIC responsibilities.