Q&A: Can an employer offer tax-free loans?

Following the COVID-19 pandemic, times are tight for many. Whether on reduced pay due to furlough over the last 19 months, agreed interim pay cuts, a stop on overtime and/or periods of unemployment, average wages are likely to be down for many individuals.

As a short to medium term assistance measure, employers could consider offering employees a loan to help them get back on their feet. An interest free loan of up to £10,000 can be advanced to an employee without any tax implications.

If the loan balance goes above £10,000 at any point during the tax year, then the exemption is not available. Instead, the employee will be taxed on the benefit based on the official rate of interest (currently 2% 2021/22) of the average amount of the loan during the tax year.

Beyond the pandemic, loans to employees are often used as part of an employee’s remuneration package and can be useful for upfront work-related costs such as season tickets for travel to work.

Typically, arrangements are entered into for the loan to be paid back over a set period of time with deductions taken from the employees’ net salary on a monthly basis. Provisions should also be put in place to repay the loan should the employee leave before the end of the loan term.

If you are looking to revamp the remuneration package offered to your employees, we would recommend that professional advice is sought beforehand to confirm the tax implications of the various benefits offered for both the employer and the employee.