Some P11D and s455 tax considerations
An interest-free loan to an employee (or director) is chargeable to tax if it exceeds £10,000 at any time during the tax year. The amount chargeable is the rate of interest set as the ‘official rate’. Since 5 April 2021, this has been 2% and is charged on the average amount outstanding during the fiscal year.
Any amount written off is chargeable as a payment of emoluments. If the company writes off an overdrawn loan account balance, tax and NICs need to be considered. At the time of the write-off this is treated as if it was a cash payment of earnings for Class 1 NICs purposes, so it needs to go through payroll for NICs.
However, for tax purposes, the treatment is completely different and will depend upon whether the director is also a shareholder and if the loan being written off was previously subject to s455 tax in the company:
If the director does not have the funds to meet the extra tax cost and does not want to meet the additional Class 1 NICs out of other earnings at the time of the writing-off, the amount to be written off will need to be grossed-up. This means that while the write-off is treated like a dividend for income tax purposes, unlike an actual dividend it is not exempt from national insurance contributions. An example to illustrate the cost implications could look as below:
Mrs A is a director and a higher rate taxpayer. The company resolves to write off the balance of £20,000 on her overdrawn loan account and meet any additional costs for her. In order to complete its RTI return, the company needs to arrive at a figure for her gross earnings which ensures that, after deduction of PAYE and employee’s Class 1 NICs, there will be a net amount of £20,000. Of course, Mrs A herself does not receive anything more through payroll. The writing-off of the loan counts as the payment and so care needs to be taken to exclude £20,000 of the net pay resulting from the payroll calculation when other earnings for the same period are paid to her.
If Mrs A is a higher rate taxpayer paying 3.25% (rate is increased from 2% to 3.25% from 6 April 2022) Class 1 primary NICs, her gross pay will be £35,242.29 (£20,000/ (100 – 40 – 3.25) % = £35,242). Employer’s Class 1 NICs at 15.05% of £5,303.96 will also be due to HMRC in respect of the tax month in which the loan write-off took place.
Further, there is no corporation tax deduction for the amount written off (CTA 2009, s.321A).
The de minimis exemption of £10,000 (above) does not apply to a loan to a participator in a close company. If such a person has a loan or advance nine months after the end of the accounting period in which the advance or loan was made, a charge will arise under s455 Corporation Tax Act 2010 (CTA 2010) which is 32.5% of the amount outstanding.
The benefit in kind charge will not be made if:
For the purposes of establishing whether a taxable benefit arises, it is necessary to aggregate all loans and advances. As well as straightforward loans, the following are also regarded as loans:
A civil servant was required by his employers to move to London from Wigan. He received an advance of salary which was interest-free and repayable on demand in certain circumstances. It was repaid by monthly instalments over ten years and he was assessed on it. He appealed, contending that he received no benefit from it. This was rejected by the court, holding that the true nature of the advance was a loan from the employer. Williams v Todd [Ch D 1988, 60TC 727]. Further details on advances of expenses can be found at EIM26155.
There are two methods of calculating beneficial loan interest:
The averaging method automatically applies unless the employee elects for the alternative precise method, or the Inspector gives notice that he or she intends to use the precise method. An example of the calculation using the average method can be found at EIM26311.
If interest is charged on loans over £10k and no benefit in kind arises, the amounts are still reported on P11D.
This ACCA article on how to avoid common errors and omissions when submitting P11Ds is worth looking at before making any submissions.
ACCA’s full guide to benefits and forms P11D is available from our website.