Do I have to pay tax on a cheap or interest-free loan from my employer?

Full answer

A beneficial loan arises when an employer lends you money interest-free, or at an interest rate below HMRC's 'official rate'. The benefit is the interest you saved compared with the official rate, and it is treated as a taxable benefit in kind reported on form P11D. The key threshold is GBP 10,000. If the total of all beneficial loans you have from your employer never exceeds GBP 10,000 at any point during the tax year, there is no tax charge at all -- this is the small-loans exemption. If the balance goes over GBP 10,000 even briefly, the whole loan can fall within the charge for the relevant period. The taxable benefit is the official rate of interest applied to the loan balance, minus any interest you actually paid. HMRC sets the official rate each tax year (this figure is not in this rate card -- check gov.uk for the current official rate before calculating). The benefit is added to your income and taxed at your marginal rate -- 20%, 40% or 45% -- and the employer pays Class 1A National Insurance on it at 15% (2026/27). Worked example (illustrative): suppose you have an GBP 20,000 interest-free employer loan for a full year and the official rate is, say, X%. The taxable benefit is GBP 20,000 multiplied by X%. A higher-rate (40%) employee would pay 40% of that benefit in tax. Substitute the current official rate from gov.uk to get the actual figure. Who it affects: employees and directors with season-ticket loans, relocation loans, or other staff loans above GBP 10,000. Certain loans are exempt, such as qualifying loans where the interest would itself be tax-deductible. Loans written off are taxed as employment income and usually attract NI too. Use an income tax calculator to see how the added benefit affects your overall liability.

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