As an employer, you will be approached by an employee needing a loan for personal reasons, financial hardship, cost of a travel pass, child care fees . . . the list could go on. What do you do? And more importantly what are the tax implications of helping a loyal employee out?
Firstly, any loans below £10, 000 will not attract any further tax or NI treatment. In this case you will still have to arrange a loan agreement and repayment terms set between you and the employee; a simple document will do. The loan should be set up as a liability on the balance sheet of the company and repayments can easily be put through payroll after tax and NI payments have been taken.
But what is the loan is more than £10, 000? The tax position on these loans, if the interest rate used is either below the official rate used by the HMRC, or no interest is applied, there is a Benefit in Kind (BiK) that has to be declared. This would mean the loan would have to be stated on a P11D form and would result in extra tax being paid by the employee and Class 1A National Insurance being payable by the Company.
As always, there are complexities in making a loan to an employee so if you are in the situation where an employee is requesting a loan please do contact us for further advice.
We all want to help our employees, especially at the moment, but ensuring you understand the implications and have applied the correct tax treatment is vital.