UK Beneficial Loan Arrangements: Tax Implications for Employers 2026

What Is a Beneficial Loan Arrangement?

A beneficial loan is a loan made by an employer (or a connected person) to an employee or director at an interest rate below HMRC's official rate. The "benefit" is the interest saving the employee enjoys -- HMRC treats this saving as a taxable Benefit in Kind (BIK) under the employment income rules.

Beneficial loans commonly arise in three situations:

1. Employer loans to employees -- season ticket loans, salary advance loans, or personal loans provided as a staff benefit
2. Director loan accounts -- where a director withdraws money from their own company in excess of salary or dividends declared, creating an overdrawn loan account
3. Close company shareholder loans -- loans from a close company (usually a small private company) to a participator (shareholder)

The Official Rate of Interest

HMRC sets the official rate of interest (ORI) each April. For 2026/27 the rate is approximately 2.25% -- you should always confirm the precise current rate on HMRC's website or with your accountant, as it can change annually.

The BIK arises on the difference between:

• Interest at the official rate on the average or outstanding loan balance
• Any interest actually paid by the employee or director

Example: Director borrows £50,000 from her company. The company charges no interest. Official rate is 2.25%. BIK = £50,000 x 2.25% = £1,125 per year. This £1,125 is added to the director's employment income and taxed at her marginal rate, and Class 1A National Insurance (13.8%) is payable by the employer.

The £10,000 Exemption

If the total of all loans from an employer to an employee does not exceed £10,000 at any point during the tax year, no BIK arises. This is an "aggregate" test -- it applies to the total of all loans from that employer, not to each loan individually.

Important: If the combined balance exceeds £10,000 even for a single day during the tax year, the exemption is lost for the entire year and BIK applies to the full balance throughout that year.

How to Calculate the Benefit in Kind

HMRC allows two calculation methods:

Precise Method

Calculate the interest at the official rate on the exact outstanding balance each day (or each month), then deduct any interest actually paid. This method is most accurate when loan balances fluctuate significantly during the year.

Average Balance Method (Simpler)

Calculate the interest on the average of the opening and closing balances for the tax year:

Average balance = (Opening balance + Closing balance) / 2

BIK = Average balance x Official rate - Interest actually paid

Example: Director loan account opens the tax year at £20,000 and closes at £30,000. No interest charged.

• Average balance = (£20,000 + £30,000) / 2 = £25,000
• BIK = £25,000 x 2.25% = £563

The employer can choose which method gives the lower BIK figure and use that.

P11D Reporting Requirements

Where a beneficial loan exceeds £10,000 at any point in the tax year, the employer must report it on a P11D form submitted to HMRC by 6 July following the end of the tax year. The employer must also:

• Pay Class 1A National Insurance at 13.8% on the BIK value by 19 July (22 July if paying electronically)
• Provide the employee with a copy of the P11D by 6 July

Employees then declare the BIK on their Self Assessment tax return (if they complete one) or HMRC adjusts their PAYE code to collect the tax.

Making Good

An employee can eliminate the BIK entirely by paying interest at or above the official rate. They can also "make good" (repay money directly) during the tax year to reduce the average balance used in the calculation. Making good after 5 April but before 6 July is also permitted for beneficial loans (an exception to the general rule on making good).

Director Loan Accounts (DLAs)

A Director Loan Account (DLA) tracks money moving between a director and their company that is not salary, dividends, or expenses. When a director withdraws more than they have put in or been paid in salary and dividends, the DLA becomes overdrawn -- meaning the director owes money to the company.

An overdrawn DLA is the most common form of beneficial loan arrangement for owner-managed businesses. Two key tax charges apply:

BIK on the Overdrawn DLA

If the DLA exceeds £10,000 at any point in the tax year and no (or insufficient) interest is charged, a BIK arises on the director for income tax and Class 1A NI applies on the employer company -- calculated as described above.

S455 Tax on the Company

Under S455 of the Corporation Tax Act 2010, if a close company (broadly, a company controlled by 5 or fewer shareholders) has an outstanding loan to a participator (shareholder) at the end of its accounting period, the company must pay a S455 tax charge of 33.75% on the outstanding balance.

Example: Company year-end 31 March 2027. Director's DLA is overdrawn by £40,000 at that date. S455 tax = £40,000 x 33.75% = £13,500. The company must pay this by 1 January 2028. If the director repays the £40,000 by, say, 30 June 2027, the S455 is repaid to the company but not until 1 January 2028 (nine months after 31 March 2027).

Bed-and-Breakfasting Rules

HMRC has rules to prevent directors from clearing the DLA just before year-end and re-borrowing shortly after (to avoid S455). If a loan of £15,000 or more is repaid and a further loan is taken within 30 days, the S455 still applies to the extent of the re-borrowing.

Loans Written Off

If an employer writes off (forgives) a loan to an employee or director, the written-off amount is treated as:

• Employment income for employees -- subject to income tax via PAYE and Class 1 NI
• Distribution for director-shareholders -- taxed as a dividend, using the dividend tax rates (8.75% basic, 33.75% higher, 39.35% additional in 2026/27) and dividend allowance (£500)

Writing off a DLA does not recover any S455 tax previously paid -- that S455 is permanently lost when the loan is written off rather than repaid.

Qualifying Loans

Some loans are excluded from the beneficial loan rules entirely:

• Loans on ordinary commercial terms where the employer is in the business of lending money (e.g. bank employees with staff mortgages on commercial terms)
• Fixed and interest loans where the interest rate is at or above the official rate from the start
• Qualifying fixed-term cheap loans where the employee is not required to pay interest but conditions are met under specific HMRC concessions (rarely applicable)

Frequently Asked Questions

What is the current official rate of interest for beneficial loans? The official rate for 2026/27 is approximately 2.25%. HMRC publishes the rate each April and it can change annually. Always confirm the current rate at gov.uk before calculating the BIK.

Does the £10,000 exemption apply per loan or in total? It applies to the total aggregate of all loans from that employer to that employee. Multiple small loans are added together for the threshold test.

If my DLA is overdrawn by less than £10,000, do I still need to report it? No BIK arises and no P11D reporting is required if the balance stays below £10,000 throughout the entire tax year. However, S455 still applies to the company if the close company rules are met.

Can a company charge the director interest on their DLA to avoid the BIK? Yes. If the company charges interest at or above the official rate, no BIK arises. The interest received by the company is taxable as income, and the director gets income tax relief only if the DLA is used for a qualifying purpose.

What rate applies to S455 tax? S455 tax is charged at 33.75% -- the same rate as the higher rate dividend tax. This rate was increased from 32.5% in April 2022 and remains at 33.75% in 2026/27.

When is S455 tax refunded after the loan is repaid? The S455 refund arises nine months and one day after the end of the accounting period in which the loan was repaid. There is no interest on the refund.

Do beneficial loan rules apply to loans to family members of directors? Loans to associates of participators (including spouses and children of directors in close companies) can also attract S455. The BIK rules apply where the connection is through employment.

What happens if the company writes off the director's loan instead of the director repaying it? The written-off amount is treated as a distribution (dividend) to the director and taxed accordingly. The company does not get the S455 back -- it is lost permanently.

Can a season ticket loan to an employee be a beneficial loan? Yes, if the loan for a season ticket exceeds £10,000 (unlikely) or charges below the official rate. Season ticket loans are common staff benefits; they are typically small enough to fall within the £10,000 exemption.

Are beneficial loan rules different for close companies vs large employers? The BIK and P11D rules are the same for all employers. S455 tax is specific to close companies (controlled by 5 or fewer participators). Large listed companies are not close companies and do not face S455.