borrowing from your employer ?

zippe

Hi all,
Has anybody had any experience of borrowing money from an employer? I have been relocated and have been offered a loan from my employer to help with the cost of buying a new home.

This will be interest free but will be taxed in the same way as my company car, (benefit in kind) how much would a £15000 loan cost in real terms?

Is there a web site to calculate this?

I earn under £40000 per annum before bonuses.

Many thanks Paul

The_Unready

Hi,

I've got a similar employer loan to you to assist with a house purchase.

You will be taxed as follows:

Add together the outstanding amount at the beginning of the tax year and the outstanding amount at the end of the tax year.

Divide this by 2 (call this figure "A")

If the loan did not span the whole of the tax year then further adjustments are made to produce a pro-rata figure. If the loan spanned the whole of the tax year then no adjustments are made at this point. Carry on to the next step.

Multiply "A" by the official HMRC interest rate (this was 4.75% in FY 09/10 - I'm not sure of later years.)

This gives you the cash equivalent of your benefit in kind. You are taxed at your marginal tax rate on this amount (ie, 20% in your case).

Hope this helps.

The Unready

opinions4u

Hmrc have an official rate for this of 4%. In other words a debt of £15k for a year should attract £600 interest. You pay tax at your highest rate on this. So a bill of £120 a year on this example. The official rate is variable.

If your debt is reducing then the liability is reducing with it.

The_Unready

Hi again,

Just checked - the official HMRC rate of interest for 10/11 and 11/12 is 4%.

The Unready

The_Unready

Oops - just beaten to it!

The Unready.

zippe

Thank you

so how do you get to the £120 ?

I plan on paying as little as sensibly allowed for the first year say £175 per month (although any bonus will also be paid back)so the start would be £15000 and the end of the tax year could be £13100

Sorry could you explain how I get to £120?

Thanks again Paul

BlueC

Using the Unready's formula above...

15000 + 13100 = 28100

28100 / 2 = 14050

14050 * 0.04 = 562

Assuming you would pay 20% tax on the £562 interest that would be:

0.2 * 562 = £112.40

zippe

Thank you all,

sorry a bit of a dim moment. x-ing 4 %...

This would be an advised way of borrowing money then?

This would reduce the rate of my mortgage by increasing my deposit and as we are debt free surely this is the way to go?

ILW

Is the loan interest free?

zippe

yes, it would be

opinions4u

£15,000 x 4% = £600. This is the figure HMRC think is a commercial rate for loans from an employer - so the value of the benefit is £600 (assuming the debt doesn't get repaid and remians at £15k).

£600 x 20% tax = £120 (double it for 40% tax).

The £112 figure above is more accurate if you're paying £175 a month. My figure was provided because I was too lazy to work out your debt reduction schedule!

Effectively it's a loan at 0.8% for a basic rate taxpayer. So if it means borrowing less on a mortgage and the repayment schedule is affordable it's almost certainly a good idea.