When does an employee loan become a taxable benefit in kind?

Full answer

**The £10,000 threshold** HMRC allows employers to make interest-free or low-interest loans to employees without creating a benefit in kind charge, provided the total balance of all loans to that employee does not exceed £10,000 at any point in the tax year. If the balance exceeds £10,000 even briefly, the entire loan becomes a benefit. **How the benefit is calculated** The taxable benefit is the difference between: - Interest actually paid by the employee, and - Interest that would have been payable at HMRC's official interest rate For 2026/27 the official rate is approximately 2.25% (check HMRC — it is reviewed annually and changed via statutory instrument). **Example: David, director loan** David's company lends him £50,000 interest-free. - Official rate interest: 2.25% × £50,000 = £1,125 - Interest David pays: £0 - Benefit in kind: £1,125 - David pays income tax at 40%: £1,125 × 40% = **£450/year** - Employer pays Class 1A NI: £1,125 × 15% = **£168.75/year** **Director's overdrawn loan account (section 455 tax)** For company directors specifically, if a loan from their own company remains outstanding nine months after the company's year-end, a section 455 tax charge applies: currently 33.75% of the outstanding balance. This is a temporary tax — it is repaid to the company when the loan is repaid. This is separate from the BIK charge. **Reporting** Loans above £10,000 must be reported on form P11D by 6 July after the tax year end. The employer also pays Class 1A NI. **Loan write-off** If an employer writes off an employee loan, the full amount written off is treated as employment income and subject to income tax and NI in full — not as a benefit in kind.

More answers

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