This Content Was Last Updated on November 5, 2015 by Jessica Garbett


How do I calculate the benefit arising on a director or employee loan? What are the exemptions?


Normal method is to take the average for the year:

  1. Take the average of the loan outstanding at 5 April at beginning of the year and 5 April at the end of the year (or at the date the loan was made or discharged or the employee died if in that tax year).
  2. Multiply that figure by the number of whole months (a month begins on sixth day of each calendar month) during which the loan was outstanding in that year and divide by twelve.
  3. Multiply the result by the official rate of interest in force or, if the rate changed, the average rate (on a daily basis), for the period during which the loan was outstanding during the year.
  4. Deduct the interest paid, if any, by the employee/director to the company.

An alternative method may be imposed by HMRC or may be elected by the employee. Notice of imposition by HMRC or election by employee must be given within twelve months after 31 January following the relevant tax year. This alternative method uses the daily value of the loan and the official rate of interest for those dates.

Having calculated the interest on the loan at the official rate any interest actually paid by the employee to the employer is deducted to give the amount chargeable to tax.

From 6 April 2010 the ‘official rate’ of interest has been 4%.


Lower-paid employees are not subject to this charge. These are employees (not directors) who earn at a rate of less than £8,500 a year.

A full time working director with no material interest in the company who earns at a rate of less than £8,500 a year.

A director of a charity or non-profit making concern who earns at a rate of less than £8,500 a year.

No amount is treated as earnings in respect of a loan which at no time in the tax year exceeded £10,000 for the year ended 5 April 2015 (increased from £5,000 for the year ended April 2014).

No benefit in kind arises to a loan on ‘ordinary commercial terms’ (a loan made in the ordinary course of business by a lender whose business includes either the lending of money or the supply of goods or services on credit, and certain other conditions) (ITEPA 2003 s176).

Article contributed by ACCA In Practice