ACCA TX UK Syllabus B. Income Tax And Nic Liabilities - Beneficial loan benefit - Notes 10 / 12
Beneficial Loan Benefit
This benefit arises when an employer gives an employee a loan at an interest rate that is cheaper than the official interest rate (2.25%).
For example, a beneficial loan benefit would arise if an employer gave an employee a £15,000 loan at 1% per annum.
This is because 1% is cheaper than the 2.25% official interest rate.
Carefully note – if the loan is £10,000 or less, no beneficial loan benefit will arise at all.
If the loan is above £10,000 – then a benefit on the full amount of the loan will arise.
Proforma
| £ | ||
|---|---|---|
| Money value of the loan benefit | X | |
| Less: | Interest actually paid by employee | (X) |
| Beneficial loan benefit | X |
How to calculate the monetary value of the loan benefit?
There are 2 ways to calculate the monetary value of the loan benefit.
The average method applies automatically but the taxpayer or HMRC can elect for the strict method if it is more beneficial for them
eg the taxpayer will elect when the strict method produces a smaller benefit figure and HMRC can elect if the strict method gives a MUCH higher benefit figure.
Average method
(Loan outstanding at start of year + Loan outstanding at end of year)/2 * Official interest rate = £x
Strict method
You must find the interest payable for the actual loan outstanding at all times. (Much easier to understand with an example)
Illustration - Average method
Vijay was given a loan of £35,000 by his employer on 06/04/2024. Interest is payable on this loan at 1% per annum.
On 01/06/2024, Vijay repaid £5,000 of the loan and on 01/12/2024, Vijay repaid another £15,000 of the loan.
The remaining £15,000 was still outstanding at 05/04/2025.
What is the taxable benefit of the beneficial loan using the average method?
Solution:
| Average method | £ | |
| Money value of the loan benefit | (£35,000 + £15,000)/2 * 2.25% | 563 |
| Less: | Interest actually paid by employee (w1) | (258) |
| Beneficial loan benefit | 305 |
£305 – is the beneficial loan benefit that Vijay would have to pay income tax on IF the average method was used.
(W1) - Interest paid by Vijay on loan
| From 06/04/2024 – 01/06/2024 | (2 months) Vijay paid 1% interest on £35,000 loan outstanding = | £35,000 * 1% * 2/12 = £58 |
| From 01/06/2024 – 01/12/2024 | (6 months) Vijay paid 1% interest on £30,000 loan outstanding (£5,000 was repaid)= | £30,000 * 1% * 6/12 = £150 |
| From 01/12/2024 – 05/04/2025 | (4 months) Vijay paid 1% interest on £15,000 loan outstanding (another £15,000 was repaid)= | £15,000 * 1% * 4/12 = £50 |
| Total interest paid by Vijay | £258 |
Illustration - Strict method
Vijay was given a loan of £35,000 by his employer on 06/04/2024. Interest is payable on this loan at 1% per annum.
On 01/06/2024, Vijay repaid £5,000 of the loan and on 01/12/2024, Vijay repaid another £15,000 of the loan.
The remaining £15,000 was still outstanding at 05/04/2025.
What is the taxable benefit of the beneficial loan using the Strict method?
Solution:
| Strict method | £ | |
| Monetary value of the loan benefit | Vijay should have paid (w1) | 582 |
| Less: | Vijay actually paid (figure from previous example) | (258) |
| Beneficial loan benefit | 324 |
| From 06/04/2024 – 01/06/2024 | (2 months) Vijay should pay 2.25% interest on £35,000 loan outstanding = | £35,000 * 2.25% * 2/12 = £131 |
| From 01/06/2024 – 01/12/2024 | (6 months) Vijay should pay 2.25% interest on £30,000 loan outstanding (£5,000 was repaid) = | £30,000 * 2.25% * 6/12 = £338 |
| From 01/12/2024 – 05/04/2025 | (4 months) Vijay should pay 2.25% interest on £15,000 loan outstanding (another £15,000 was repaid) = | £15,000 * 2.25% * 4/12 = £113 |
Conclusion
Vijay’s loan benefit with the average method is : £305
Vijay’s loan benefit with the strict method is : £324
Which one will he pay income tax on?
Vijay will pay tax on the loan benefit arising from the average method - £305
- as this is the automatic method and the strict method is not so different that HMRC would elect for it.
Summary
A beneficial loan is one made to an employee below the official rate of interest (2.25%)
The benefit is the interest on the loan at the official rate, less any interest actually paid by the employee.
There is no benefit if the loans do not exceed £10,000 in total at any time in the tax year
The benefit is calculated using the Average method or the Strict method.
Average method
This uses the loan outstanding at the beginning and the end of the tax year.
If the loan is taken out or paid back during the tax year, that date is used instead of the beginning or end the tax year.
Strict method
This calculates benefit day by day on the balance actually outstanding.
Either the taxpayer or HMRC can decide to use the Strict method. HMRC will elect if the benefit is significantly higher under this method.