Employee Loans

emmadragon

Hi,

Not sure if this is the right place to put this but here goes...

I want to approach my employer for a loan, my car is unlikely to pass its MOT and I want to do some home improvements. We are a small business and my boss and I are very close however he prefers if I find out the facts about these things and tell him how it works. I've tried to find some info online but it seems to go over my head a little especially in regards to interest free/interest payments.

So...
Can someone explain to me how it works and whether there are any limitations? I want to ask for £8000 and I am sure my boss won't mind me not paying interest however I am happy to do so. I understand the payments will come off my salary and since I've not had a pay rise in several years I am sure my boss will be happy to offer it to me as a staff benefit. Any help on this situation will be gratefully recieved.

Thanks in advance,
Emma

saintjammyswine

If you are given special terms for being an employee you could be taxed as a benefit in kind. An employer willing to lend £8k? wow for that.

heretolearn_2

An interest free loan would be taxable as a benefit in kind.

Your employer cannot give you a loan with interest unless they have a lending license.

Your employer would be exceptionally generous to give you an £8k loan. Especially as a small business. Don't get your hopes up.

Emmzi

personally I would never do this unless for job related expenses (eg travel pass) as it muddies the waters. Is he your boss, is he a mate, is he your bank manager? What if you want to leave? What if he nows tries to take advantage (you rub my back..)

Can't you ask for a payrise and go to your bank? It would be much cleaner. The whole thing makes me uncomfortable.

kingfisherblue

I didn't know that employers could offer loans that are not business related - has your employer offered loans to other employees, or are you just hoping to get a cheap loan?

ceh209

An interest free loan would be taxable as a benefit in kind.

Keep it under £5,000 and it won't be taxed.

Go over £5,000 and you'll pay tax at your normal rate (20/40%?) on the difference between the interest rate actually paid and the official rate of interest set by HMRC, currently 4.00%

Example:

£8,000 over 4 years at nil interest, so paying off £167 per month.
Taken out on 6 April 2011 (keeping it simple for tax purposes!)

Balance at start of year = £8,000
Balance at end of year = £6,000
Average balance = £7,000

Basic rate taxpayer, so taxed at 20%.
£7,000 * (4% - 0%) * 20% = £56 tax for that tax year.

As you can see the tax will get lower in each year as you pay more off. If it's under £5000 for the whole year then there will be no tax.

The example I've given is using the average method, you can also use the strict method of calculation (difference arises when you don't make equal monthly payments, or take it out part way through the year). Google 'beneficial loans' for more information.

I didn't know that employers could offer loans that are not business related

They can do whatever they want! Hence why it's taxed... My employer offers up to £7k for new graduates, I took £5k so I didn't get taxed.

somethingcorporate

Ceh, can you provide any links to back up the £5k limit for tax?

Emmzi

http://www.hmrc.gov.uk/paye/exb/a-z/l/loans.htm

Exceptions

For company directors or employees earning at a rate of £8,500 or more per year there are no reporting requirements and no Class 1A NICs to pay if any of the following applies:

• You provide a loan in the normal course of a domestic or family relationship - for example, if you provide a cheap loan to a family member who works for you. This only applies to loans you make as an individual, not to loans made by a company you control (even if you are the company's sole owner and employee).
• The combined outstanding value of your loans to an employee is less than £5,000 throughout the whole tax year.
• Your loan to an employee is for a fixed and invariable period and at a fixed and invariable rate that was equal to or higher than the official interest rate when the loan was taken out.
• You offered the same type of loan under identical terms and conditions to the general public as well as to your employee (this exception applies mainly to commercial lenders).
• You provide a 'qualifying loan' all of the interest on which qualifies for tax relief - follow the link below for technical guidance on this complex area.

ceh209

http://www.hmrc.gov.uk/ebu/p11d-ws4-2011.pdf halfway down the first page


Edit: Emmzi beat me to it!

ohreally

emmadragon wrote: »

I understand the payments will come off my salary

Do you have collateral?

How does the boss get his money back if you drop dead and get planted next week?

SarEl

ohreally wrote: »

Do you have collateral?

How does the boss get his money back if you drop dead and get planted next week?

Or quit. Or get made redundant. And have you considered the fact that in the event of those two most employee loans are due in full immediately?