An interest-free loan to an employee (or director) is chargeable to tax if it exceeds £10,000 at any time during the tax year. The amount chargeable is the rate of interest set as the ‘official rate’. Since 6 April 2023, this has been 2.25% and is charged on the average amount outstanding during the fiscal year.

The de minimis exemption of £10,000 does not apply to a loan to a participator in a close company. If such a person has a loan or advance nine months after the end of the accounting period in which the advance or loan was made, a charge will arise under s455 Corporation Tax Act 2010 (CTA 2010) which is 33.75% of the amount outstanding.

The benefit in kind charge will not be made if:

• the loan or advance does not exceed £10,000 and
• the borrower works full time for the company or one of its associated companies.

For the purposes of establishing whether a taxable benefit arises, it is necessary to aggregate all loans and advances. As well as straightforward loans, the following are also regarded as loans:

• overdrawn director’s loan account and
• advances on account of expenses payments; although in practice HMRC disregard advances not exceeding £1,000 provided that the amounts are spent within six months and the employee accounts to the employer at regular intervals for the expenses (ITEPA 2003, ss174–190).

Example

A civil servant was required by his employers to move to London from Wigan. He received an advance of salary which was interest-free and repayable on demand in certain circumstances. It was repaid by monthly instalments over ten years and he was assessed on it. He appealed, contending that he received no benefit from it. This was rejected by the court, holding that the true nature of the advance was a loan from the employer. Williams v Todd [Ch D 1988, 60TC 727]. Further details on advances of expenses can be found at EIM26155.

There are two methods of calculating beneficial loan interest:

• average basis (based on the opening and closing balances of the loan)
• alternative method – calculated on the day-to-day outstanding balance of the loan.

The averaging method automatically applies unless the employee elects for the alternative precise method, or the inspector gives notice that he or she intends to use the precise method. An example of the calculation using the average method can be found at EIM26311.

If interest is charged on loans over £10k and no benefit in kind arises, the amounts are still reported on P11D.

Loans written off

Any amount written off is chargeable to income tax, but the treatment can depend on the circumstances and the way the loan has been waived and recorded in the company’s books – read our article on the tax implications on written-off loans.

Our article on how to avoid common errors and omissions when submitting P11Ds is worth looking at before making any submissions.

Read ACCA’s full guide to benefits and forms P11D

Major changes from tax year 2025-26 onwards

From 6 April 2025, the official rate of interest (ORI) used to calculate benefit-in-kind (BiK) values for employer-provided low-interest loans and living accommodation rose sharply from 2.25% to 3.75% – its biggest change in over 30 years. Coupled with the increased Class 1A National Insurance rate on taxable benefits, now 15% (up from 13.8%), this change means both employers and employees face noticeably higher costs in the 2025/26 tax year.

Employers offering interest-free or subsidised loans, or living accommodation, should carefully evaluate whether these benefits remain appropriate in light of rising costs. Employees may similarly wish to reconsider their positions, given the larger tax bills associated with these benefits.

A further complication is the introduction of quarterly reviews of the ORI, rather than the long-standing annual rate. From April 2025 onwards, the ORI will be updated quarterly – on 6 July, 6 October, and 6 January. If the ORI changes mid-year, calculating BiK becomes more complex: employers must compute benefits separately for each period at the applicable rate and combine them for reporting on P11D and P11D(b) forms.

To stay compliant, employers should monitor the HMRC ORI page, ensure payroll systems are updated promptly, and communicate these changes proactively to employees. Those using tax or payroll software should check it handles multiple ORI rates per year appropriately.

Read more guidance at GOV.UK 

Finally, as announced by the government, mandatory payrolling for benefits in kind and taxable employment expenses will now be introduced from April 2027, to provide more time for employers, payroll professionals, software providers, tax agents and others to prepare for the change.