Given this challenging economic environment, many employers are looking to see how they can help employees financially. Pay increases may not be an option, bearing in mind the additional tax and National Insurance contributions (NICs) implications for employers and employees.
For some employees, tax-free, non-cash vouchers to assist with rising bills and food prices may be an alternative, as may proactive measures such as providing subsidised meals at work or facilitating car-share arrangements. Staff could be allowed to sell back unused holiday entitlement (subject to the minimum 5.6 weeks paid annual leave, which cannot be paid in lieu).
Advances for Expenses
Some types of loan are exempt from these rules, so no benefit-in-kind arises. Such payments will usually be in the form of advances made to pay for necessary expenses or incidental overnight expenses on business trips. The amount must be less than £1,000 and be spent within six months. The employee must also account to the company regularly.
However, HMRC will allow payments of more than this amount if there is a good reason for exceeding the limit (e.g., an advance to cover a lengthy business trip).
Cheap or Interest-Free Loans
In addition, there is the option of providing cheap or interest-free loans. Should an employer lend an employee money interest-free or at a rate below the official rate of 2.25%, the employee is charged to tax as a benefit-in-kind on an amount equal to interest at the official rate less any interest paid.
The employer is also subject to Class 1A NICs at 13.8%. However, there is no charge should the loans be on commercial terms by employers who lend or supply goods on credit to the general public despite the interest paid being less than the official rate.
There is also no charge if all beneficial loans to an employee are less than £10,000. The amount is a de minimis limit in that if the amount an employee borrows exceeds the limit, even by just £1 for one day in a tax year, the whole loan is taxable and not just the excess over the limit.
Therefore, all loans to the same employee must be aggregated to check whether the limit has been exceeded. As beneficial loans cannot be payrolled, they must be reported on forms P11D by 6 July following the tax year end.
Waiving an Employee Loan
There may be instances where the loan is written off or the balance outstanding is waived. Such a situation includes the employee stopping work and loan recovery will not be possible. Loans waived always count as taxable income for the employee, even if the loan was not a taxable benefit-in-kind when first granted.
The exceptions are where the loan was to an employee’s relative and the employee gained no personal benefit from the loan being waived, or the loan is waived following the death of an employee. The exception does not apply if a loan is waived because an employee is critically ill and it is known that they will not be returning to work.
Practical Tip
Should the loan be taxable, the taxable amount is calculated either by using the average loan balance by adding together the loan balances at the beginning and end of the year and dividing by two, or by using the precise method which tracks the amount outstanding each day if this produces a better (lower tax and NICs) result.