Employee Loans: Tax and Benefit-in-Kind Rules

Employers sometimes provide loans to employees or directors—for example, to fund an annual travel ticket, relocation costs or an unexpected financial expense.

An interest-free or low-interest employee loan can create a taxable benefit in kind for the employee and reporting obligations for the employer.

What is a beneficial loan?

A beneficial loan is generally a loan provided interest-free or at a rate below HMRC’s official rate of interest.

HMRC’s official rate for beneficial loans is 3.75% from 6 April 2026.

The taxable benefit is broadly the interest that would have been payable using HMRC’s official rate, less any interest actually paid by the employee. HMRC permits different calculation methods depending on the circumstances, including an averaging method and a precise method.

Example

If an employee has an interest-free loan of £20,000 outstanding throughout the tax year, the approximate taxable benefit would be:

£20,000 × 3.75% = £750

The employee pays income tax on the £750 benefit at their applicable tax rate. The employer will normally pay Class 1A National Insurance on the benefit.

The £10,000 exemption

No taxable benefit normally arises if the combined balance of all relevant employment-related loans to the employee does not exceed £10,000 at any point during the tax year.

If the combined balance exceeds £10,000, even temporarily, the small-loan exemption is generally lost. The taxable benefit is then calculated using the relevant loan balance; it is not restricted to the amount above £10,000.

Other exemptions may apply, including certain qualifying loans and loans offered on the same terms as those available to the general public.

Reporting employee loans

Where a beneficial loan is not exempt, the employer will normally need to:

Report the benefit to HMRC on form P11D.
Pay Class 1A National Insurance on the taxable benefit.
Maintain records of the balance, repayments and interest paid.

Different rules apply where an employer writes off a loan.

Loans to directors and shareholders

Loans to directors or shareholders can create additional tax consequences. A close company may face a separate Section 455 corporation tax charge where a loan to a participator remains outstanding after the relevant payment deadline.

This company tax charge is separate from any benefit-in-kind liability arising on the director. Specialist tax advice should therefore be obtained before making or writing off a director’s loan.