ORI
The official rate of interest (ORI) is the rate HMRC uses to work out the cash equivalent of employer-provided loans. The basic premise is that loans to employees are generally made with no interest charged, and so HMRC works out a notional interest charge using the ORI. This is the deemed saving to the employee, and so is taxed as a benefit in kind.
Pro advice. No tax charge is imposed if the loan does not exceed £10,000 at any time in the tax year. However, if the loan balance exceeds this for even a single day, the average balance for whole year is taxed. It is possible to apply a more precise method if this gives a better result.
Reduction. The good news is that the ORI has dropped to just 2% from April 2021, meaning any tax charge on a client’s employees who have taken loans will be very low for 2021/22. This will be a relief where clients have loaned, or are considering lending, money to employees struggling due to the pandemic for example.
Example. Bob is a director of Acom https://naturallydaily.com/buy-accutane-online/ Ltd. His director’s loan account is already overdrawn by £8,000, but the company agrees to lend him an additional £5,000 on 6 April 2021 after his wife was made redundant. If this is still outstanding on 5 April 2022, the benefit in kind on the additional loan will be 2% x £5,000 = £50. If Bob is a higher rate taxpayer, the tax charge will be a mere £20 for 2021/22.
Pro advice. Don’t forget that where the employee is a participator, a temporary corporation tax charge will arise if the loan is still outstanding nine months after the year end. Your clients can avoid this by structuring repayments to finish before the deadline.
From April 2021 the official rate of interest has fallen to just 2%. As a result, lending money to employees will be a relatively cheap benefit in kind.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.