An employee who receives an interest free or cheap loan because of their job is taxed on the difference between interest at HMRC’s official rate and the interest they actually pay. The official rate is 3.75% from 6 April 2026. There is no charge if the total of all such loans never exceeds £10,000 at any point in the tax year.

What is a beneficial loan?

The rules are in sections 173 to 191 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). A taxable cheap loan is one made by reason of the employment on which no interest, or interest below the official rate, is paid. HMRC booklet 480 chapter 17 explains that “loan” is wider than lending money: it includes any form of credit, so any amount shown in the employer’s books as owed by a director or employee counts (paragraph 17.6). “Making” a loan includes arranging, guaranteeing, facilitating or taking over a loan.

The lender does not have to be the employer. The rules also catch loans from a prospective employer, from a company or partnership that controls, is controlled by or is under the same control as the employer, and from a person with a material interest in a close company that employs the borrower. Loans to the employee’s relatives are caught too, and relative has a wide meaning here: spouse, parents, children, brothers and sisters of both spouses, grandparents and grandchildren, and the spouses of all of those (paragraph 17.10). An employee who can show they derived no benefit from a loan to a relative is not charged.

How does the £10,000 threshold work?

Section 180 ITEPA disapplies the charge if, at all times in the tax year, the total outstanding on all the employee’s taxable cheap loans does not exceed £10,000. Two practical points follow.

  • It is tested day by day, not at the year end. A balance that goes above £10,000 for a single week loses the exemption for the whole year, and the benefit is then worked out on the whole loan, not just the excess.
  • Loans that only ever reduce are easy: the highest balance is the opening balance (or the amount on the day the loan was made). HMRC says accrued interest is not added to the balance until it falls due (480 paragraph 17.16).

There is a second £10,000 test for non qualifying loans. If the overall total exceeds £10,000 only because of a qualifying loan (one where interest would be eligible for tax relief), the non qualifying loans can still be exempt and the qualifying loan is charged on its own. The threshold does not apply to loans provided under salary sacrifice.

What is the official rate of interest?

The Treasury sets the official rate by statutory instrument and HMRC publishes it. HMRC’s table, last updated on 6 March 2026, shows:

Period Rate
From 6 April 2026 3.75%
2025 to 2026 (average rate) 3.75%
2024 to 2025 (average rate) 2.25%

HMRC publishes two tables. The average official rate is used where the loan was outstanding throughout the tax year and the normal averaging method applies. The actual official rates are used in other cases, such as a loan made part way through a year in which the rate changed. The same official rate drives the additional charge on expensive living accommodation.

How do you calculate the benefit using the average method?

The normal averaging method in section 182 applies automatically. The steps in 480 paragraph 17.29 are:

  1. Take the maximum balance on 5 April before the tax year (or on the day the loan was made, if later).
  2. Take the maximum balance on 5 April at the end of the tax year (or on the day the loan was repaid, if earlier).
  3. Add the two and divide by 2 to get the average loan.
  4. Multiply by the number of whole months the loan was outstanding and divide by 12. Months start on the 6th.
  5. Multiply by the average official rate for the period.
  6. Deduct interest the employee paid for the year.

Illustration only. An employee owes £30,000 on 5 April 2026 and £20,000 on 5 April 2027, and pays £200 of interest for the year. Assuming 3.75% applies all year: the average loan is £25,000, interest at 3.75% is £937.50, and the taxable benefit is £737.50.

When does the precise method give a different answer?

The alternative precise method in section 183 applies the official rate to the balance outstanding on each day of the year. It covers all of the employee’s beneficial loans for that year; you cannot mix methods. Either the employee or HMRC can elect for it. The employee’s deadline is 31 January in the next tax year but one, so 31 January 2029 for 2026 to 2027.

Illustration only. In the example above, suppose the £10,000 reduction was made on 6 March 2027. The balance was £30,000 for 334 days and £20,000 for 31 days. Daily interest at 3.75% gives £1,093.15, and the benefit after the £200 paid is £893.15, compared with £737.50 under averaging. Where a large balance is cleared just before 5 April, averaging understates the benefit and HMRC can give notice that it will use the precise method. Where a balance is high only in the middle of the year, averaging gives the higher figure and the employee may want to elect.

Which loans are exempt?

GOV.UK and 480 chapter 17 list the main exemptions:

  • total loans within the £10,000 threshold, as above
  • loans for a fixed and invariable period at a fixed and invariable rate that was at least the official rate when the loan was made (section 177)
  • commercial loans made by a lending business on the same terms as to the public (section 176)
  • qualifying loans where all the interest would be eligible for relief, such as a loan to buy an interest in a partnership; see qualifying loan interest relief
  • loans by an individual employer in the normal course of domestic, family or personal relationships
  • a director’s loan account that is not overdrawn at any time in the tax year

What happens if the loan is written off or the director’s account is overdrawn?

Under section 188, a loan released or written off is taxed on the amount written off, whatever its terms and even if it was never a beneficial loan. GOV.UK says the employer must report it on form P11D and deduct Class 1 National Insurance (but not PAYE tax) through payroll.

For owner managed companies, an overdrawn director’s loan account is the most common source of a beneficial loan. HMRC says that if the directors own all the shares and decide that withdrawals are remuneration, they are not loans and PAYE applies when each withdrawal is made (480 paragraph 17.38). Interest on an overdrawn current account never qualifies for relief. Company law approval of large loans is a separate question; see loans to directors and member approval.

How is it reported and what goes wrong?

Taxable loans go on form P11D (HMRC’s working sheet 4 helps with the calculation) by 6 July after the tax year, with Class 1A National Insurance at 15% for 2026 to 2027 paid by 22 July. Beneficial loans cannot be put into a PAYE Settlement Agreement. Under salary sacrifice, the taxable amount is the salary given up less interest paid, if that exceeds the normal figure.

Points that trip people up:

  • Interest only reduces the benefit if it is actually paid for the year under an obligation; a voluntary payment is not interest (480 paragraph 17.34). Interest paid late, after the figure has become final, can be taken into account on a claim under section 191.
  • Separate loans to the same director from a close company can be aggregated by election, made within 91 days of the end of the tax year.
  • The taxed amount is treated as interest paid by the employee, which can be relevant to relief where the loan is used for a qualifying purpose.
  • Loans to an employee’s adult child or parent are caught just as if made to the employee.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.