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Beneficial Loan Rates
When your employer lends you money at a low interest rate or interest-free, you may need to pay tax on the benefit you receive. HMRC sets an official interest rate each year to calculate this taxable benefit, known as a benefit-in-kind. If the difference between what you actually pay and the...
When your employer lends you money at a low interest rate or interest-free, you may need to pay tax on the benefit you receive. HMRC sets an official interest rate each year to calculate this taxable benefit, known as a benefit-in-kind. If the difference between what you actually pay and the official rate exceeds £10,000, you'll face a tax charge.
What are beneficial loans?
A beneficial loan is money borrowed from your employer at an interest rate below HMRC's official rate, or with no interest at all. Common examples include loans for season tickets, home improvements, or help with house purchases.
The "benefit" is the difference between the interest you actually pay and what you would have paid at HMRC's official rate. This benefit counts as taxable income if it exceeds certain thresholds.
The £10,000 threshold
You only pay tax on beneficial loans if the total amount you owe to your employer exceeds £10,000 at any point during the tax year. This threshold applies to the total of all loans from your employer combined, not each loan separately.
If your outstanding balance stays at or below £10,000 throughout the entire tax year, there's no benefit-in-kind charge to pay.
Official interest rates
HMRC sets official interest rates that employers must use to calculate the taxable benefit. These rates change periodically, so it's important to check which rate applies to your tax year.
For the 2025/26 tax year, the official rate is 2.25% per year.
The rate has remained at 2.25% since 6 April 2025. Before this, the rate was 2.25% from 6 April 2024, and 2.25% from 6 April 2022.
How the benefit is calculated
Your employer calculates the benefit by comparing what you actually paid in interest against what you would have paid at HMRC's official rate.
Example: You borrow £50,000 from your employer interest-free. Using the 2025/26 official rate of 2.25%, the benefit-in-kind is £1,125 (£50,000 × 2.25%). This £1,125 is added to your taxable income for the year.
If you're a basic-rate taxpayer (20%), you'd pay £225 tax on this benefit (£1,125 × 20%). A higher-rate taxpayer (40%) would pay £450.
If you pay some interest to your employer, this reduces the benefit. For instance, if you paid £500 interest on that £50,000 loan, your taxable benefit would be £625 (£1,125 - £500).
When rates change during the year
If HMRC changes the official rate part-way through a tax year, your employer must use different rates for different periods when calculating your benefit.
The benefit is worked out for each period the loan was outstanding, using the official rate that applied during that period. These amounts are then added together to give the total benefit for the tax year.
How you pay the tax
The benefit-in-kind from a beneficial loan is usually reported through your employer's payroll. Your employer includes it on your P11D form, which shows all your employment benefits for the year.
You then pay tax on this benefit through an adjustment to your PAYE tax code in a future tax year, spreading the tax due over the year. Alternatively, HMRC may collect it through your self-assessment tax return if you complete one.
National Insurance contributions (NICs) are also due on beneficial loans. Your employer pays Class 1A NICs on the benefit value at 13.8%.
Loans written off
If your employer writes off all or part of your loan (meaning you no longer have to repay it), the amount written off becomes taxable earnings. This is treated as normal income and is subject to both income tax and employee NICs through payroll in the year it's written off.
This is separate from the beneficial loan interest calculation and applies even if the loan was below the £10,000 threshold.
Keeping records
Your employer is responsible for tracking your loan balance throughout the tax year and calculating any benefit-in-kind. However, it's wise to keep your own records of:
- The amount borrowed and when
- Any repayments made
- Interest charged and paid
- Your outstanding balance at key dates
This helps you understand your tax position and check that your P11D is correct.
When beneficial loans make sense
Despite the tax charge, employer loans can still be attractive. If you'd struggle to get credit elsewhere or would pay much higher commercial interest rates, a beneficial loan might save you money overall even after the tax.
The tax charge only applies to amounts over £10,000, so smaller loans remain completely tax-free regardless of the interest rate charged.
Sources
This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.
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