Is Your Director Loan Chargeable to Benefits in Kind as Beneficial Loan?

What is a Beneficial Loan? When Does the Benefit in Kind Apply? Tax Implications

What is a Beneficial Loan?

A beneficial loan is a loan provided to a director or employee at a rate below the official rate of interest set by HMRC. This can include interest-free loans or loans with a lower interest rate than the official rate. The difference between the official rate and the actual interest rate paid is considered a benefit in kind and is taxable.

When Does the Benefit in Kind Apply?

The benefit in kind arises when:

1. Interest-Free or Low-Interest Loans: If a director receives a loan that is interest-free or has an interest rate below the official rate, the difference is taxable.
2. Loans Exceeding £10,000: If the loan amount exceeds £10,000 at any point during the tax year, it is considered a benefit in kind. The director must report this on their Self-Assessment tax return and may have to pay tax on the benefit. The key here is that it applies if the loan exceeds £10,000 at any point. In order to avoid a benefit in kind, the loan must stay below the £10,00 threshold for the whole year. Just one day over the limit brings the whole loan into charge for the whole tax year.
3. Loans Released or Written Off: If a loan is released or written off, the amount of the loan is also considered a benefit in kind.

Official Rate of Interest

The official rate of interest is determined by HMRC and is used to calculate the taxable benefit. For the 2024-2025 tax year, the official rate is 2.25%.

Tax Implications

When a beneficial loan exceeds £10,000, the company must:

1. Class 1 National Insurance: The company must pay Class 1 National Insurance on the benefit in kind, usually through the form P11D or payroll.
2. Income Tax: The director must report the benefit in kind on their Self-Assessment tax return and may have to pay tax on the difference between the official rate and the actual interest rate paid.

This is in addition to the Section 455 tax implications for the company for a director’s loan that is overdrawn if it is not repaid within 9 months of the year.

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