Where an employer provides a loan to an employee or director, or their relative, this can create a taxable benefit in kind on the beneficial loan if the loan is interest-free or interest is charged at a low rate.

But there may be further tax implications (known as Section 455 tax) for the company where there is a loan to a shareholder or a person ‘associated’ with them, as well as in some other situations. This can mean that the same loan could have multiple tax implications.

Both the beneficial loan and Section 455 tax rules can be complicated, particularly where the company’s accounting year end is materially different to the tax year. It is important to have an understanding of how both sets of rules apply, as loans to employees/directors are likely to be reviewed in any employer compliance visit and loans subject to Section 455 tax are regularly checked as part of an enquiry into a company’s Corporation Tax return.

Benefit in kind implications of interest-free and low interest loans

The beneficial loan rules apply where the amount owed by the employee or director exceeds £10,000 at any time during the tax year.

If this happens, the whole loan balance is subject to the beneficial loan rules, and not just for the period in the tax year that it exceeds £10,000. The £10,000 threshold helps avoid tax and National Insurance implications on smaller loans, such as those where the employer provides a loan for a season ticket for commuter travel.

Where the loan exceeds £10,000, a benefit in kind will arise if no interest is charged or interest is charged below HMRC’s official rate of interest. This is currently 3.75% and is now reviewed on a quarterly basis, so it is possible that the rate could change during the tax year. Keeping up to date with changing rates is important to ensure that any benefit in kind is correctly calculated. The benefit needs to be reported on Form P11D. The employer will need to pay Class 1A National Insurance on the benefit. Whilst the employee / director will pay Income Tax on it, there is no National Insurance payable by them.

Any interest paid by the employee or director will be deducted from the taxable benefit in kind, but it is important to bear in mind that the interest received by the company will be included in its taxable profits for Corporation Tax purposes.

The loan benefit can either be calculated using the average loan balance or based on the precise loan balance during the tax year.

Whilst direct loans to relatives of employees or directors can create a benefit, there is an exclusion for loans provided under the course of domestic or family arrangements as an individual.

Section 455 tax

Aside from the benefit in kind, where there is a loan from a company to a ‘participator’ or a person connected to them at the company’s accounting year end, the company may have to pay Section 455 tax on any loan balance still outstanding nine months after the company’s  year end. This is the case regardless of the level of interest charged.

The Section 455 tax rules apply to ‘close companies’, which are companies controlled by five or fewer participators or by the company’s directors. A participator includes a shareholder in the company, but can include a loan creditor of the company or someone with the right to receive income or assets in the company.

Section 455 tax is charged at the higher rate for dividend income (currently 33.75%) and is payable where the loan due from a participator has not been repaid within nine months of the company’s accounting year end. For example, if a shareholder in ABC Ltd had a loan balance of £8,000 at the company’s accounting year end of 31 December 2024 but only repaid £5,000 before 1 October 2025, the company, Section 455 tax of £1,013 would be payable (33.75% of the £3,000 outstanding at 1 October 2025).

All loans to participators need to be recorded on the company’s Corporation Tax return, including those where no Section 455 tax actually needs to be paid because the loan is repaid within nine months of the year end. There will be no Section 455 tax where the participator does not have a material interest in the company, they are a full time employee or director of the company and the loan balance is £15,000 or less.  Any Section 455 tax paid is refundable 9 months and 1 day after the end of the accounting period in which the loan is repaid.

There are special anti-avoidance rules where there is a repayment and subsequent advance of a loan subject to Section 455 tax. Where these rules apply, the loan repayment is allocated to the new loan and the Section 455 tax on the original loan is not refunded.

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

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