An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.
A taxable cheap loan is an employment-related loan:
The official rate of interest on beneficial loan arrangements is currently 2.5%. A change in the rate is only made in the event of significant changes in interest rates. An employee can also benefit if an employment-related loan is released or written off. He or she is then no longer obliged to repay the amount that was lent.
A benefit in kind will be applicable where a loan is provided at an interest rate of less than 2.5%. In addition, employers must also pay Class 1A National Insurance. It is not necessary for the loan to be advantageous to the recipient for a chargeable benefit to arise.