Employee travel loans - tax payable?

Bacardi_queen

I recieved a tax free loan of £5,000 from my employer when I joined the company in 2005. This loan is not paid back and is written off if I stay for 5 years. In the event that I leave, I have to pay it back in full.

My company also offers travel loans, however I was advised when I first joined that as I have taken out the £5,000 new joiner loan, I wasn't able to also take the travel loan as this would breach the £5,000 interest free tax threshold and I would be liable to pay tax on it.

This means that for 5 years, I can't take out a travel loan or I can but I have to pay additional tax. For the last 3 years, I have been able to put it on an interest free credit card, and pay the balance off monthly. However this year, for obvious reasons, I won't be able to do this, and the additional cost of buying my travel card monthly against annually is about £50 per month and therefore there is an obvious advantage to buying an annual.

What I want to know is, if I take out a travel loan with my employer, what is the rate of tax payable on it? I've heard two explanations, one saying tax is due on the whole of the loan in excess of £5,000. The other saying that once you go over the threshold, the whole amount including the original £5,000 is taxable but you only get taxed on the benefit (the interest that would have been payable).

Can someone give me an educated answer? Would be hugely appreciated. Oh, and if it make a difference, I'm still a basic rate tax payer but only just.

Elaine_Wilson

The basic rule is that if you have an interest-free loan then you have received a benefit equal to the interest that you are not paying. The Revenue publish official rates of interest which for 2007/08 was 6.25%

A concession has been granted that no tax will be charged provided the total amount outstanding during any tax year is no more than £5,000.

You only pay tax on the theoretical interest charge, not the capital. That only comes into the equation when the loan is written off.

If you take out the additional loan then you will breach this limit. so you will have to pay tax on the interest benefit. This page on HMRCs website gives a link to the worksheet to calculate the amount of the benefit.

trevormax

Explanation 2 is correct in that if you go over £5,000 you will have to pay the tax on the interest for the entire amount, not just the excess amount.

As Elaine has said, you only pay tax on the interest benefit you are getting so if your company charge you 3% and the Revs published amount say 6.25% then you pay tax on the difference of 3.25%. If you were to take out another £1k tomorrow on the 6th, I calculate your liability to tax would be thus:

Average working method

((5k + 6k) / 2) x 6.25% = £343. If you are BR this will cost you £69, if you are HR this will cost you £138.

Using the strict method (this would be better in this situation)

8 months at 5k x 6.25% = 208
4 months at 6k x 6.25% = 125
Total benefit = £333. @ BR this will cost you 67, @ HR this will cost you £134.

So as you can see, going over the threshold at most will only cost you £134 if you use the strict method. If as you say you are paying an extra £50 per month, then it could benefit you to take out another loan insted.

Please note the above calculation is based on both loans being interest free and you not paying anything off on them or taking on another loan by the end of the tax year. If you wish, you can PM me some figures of how much you would need to loan and I could work out how much tax it will cost you.

Bacardi_queen

Thanks to the both of you, you've been really useful. I'm glad it's just the benefit I get taxed on and not the loan itself as I think it makes it worthwhile paying the tax.

I work it out as:

Total loan (£5,000 joiner plus £3,800 travel) = £8,800
Benefit is total loan at 6.25% = £550
BR tax on £550 = £110 a year.

When compared to the additional £660 I would end up paying by buying monthly, this obviously works out value for money.

One thing though, if I only take out the travel loan in December, which puts me over the £5,000 tax free threshold, will I be liable for tax on the original £5,000 which I have benefited from since April this year? Trevormax - is that what you're referring to when calculating the 8 months and 4 months tax payable?

Also, the travel loan is repayable to the employer each month over the course of the year so it would eventually go back to £5,000 until I had to take out another travel loan. I suppose this would reduce the tax slightly however worst case scenario still makes it vfm anyway!

trevormax

Bacardi_queen wrote: »

One thing though, if I only take out the travel loan in December, which puts me over the £5,000 tax free threshold, will I be liable for tax on the original £5,000 which I have benefited from since April this year? Trevormax - is that what you're referring to when calculating the 8 months and 4 months tax payable?

Also, the travel loan is repayable to the employer each month over the course of the year so it would eventually go back to £5,000 until I had to take out another travel loan. I suppose this would reduce the tax slightly however worst case scenario still makes it vfm anyway!

Correct, I believe HMRC would class the benefit as being from the start of the year as you have had it throughout. The benefit for the extra £3,800 would be added to the £5,000 from December so would be apportioned to 4/12 as you have not had it for the entire tax year. As a BR tax payer this would give you a benefit of:

first 8 months £208
last 4 months £183
Total £391
Tax due at 20% £78 (based on no further loans/re-payments being made)

If you make repayments in the months leading up to 5th April 09 then this would further reduce the benefit and tax due.

amf

When the total loans exceed £5,000 at any point in the tax year you will be charged on a Ben Loan throughout the year as trevormax rightly said. The averaging method is normally used by HMRC but you can elect for the precise method, if you wish. For the coppers involved I'd question whether this is worthwhile....but this is a moneysaving forum;)

Just to add to the excellent advice already provided, you need to consider the tax treatment of the £5,000 loan to be written off after 5 years. When written off you will pay Class 1 N.I.C. at the prevailing rate and be charged a benefit on the amount written off.