HMRC has recently announced the official rate of interest for the 2014/15 tax year will be 3.25%. This is a reduction in the rate which has been 4% since 2010/11.
One of the more significant effects of this reduction will be on the calculation of the benefit in kind charge on beneficial loans. The official rate of interest is used to calculate the taxable value of loan provided to an employee where the employee has either not been charged interest on the loan or has been charged interest at a rate lower than the official rate.
There is an exception to this and currently employers can offer their employees loans of up to £5,000 and not charge the official rate of interest without any benefit in kind tax charges arising. From 6 April 2014 this threshold will double to £10,000. As long as the total of all employer-provided loans to an individual during the year does not exceed the £10,000 threshold, no income tax charge will arise.
The reduction in the official rate of interest, together will the doubling of the threshold, will therefore be good news to employees and employers whose tax and Class 1A national insurance liabilities will reduce accordingly and given the increasing costs of commuting will be particularly welcomed by employees receiving loans to fund their travel season ticket purchases.
The official interest rate is set in advance of the tax year but may be subject to change if the interest rates change significantly.
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