17 June 2024

With the P11d deadline fast approaching, the advisory service has been receiving queries on benefits and expenses. To assist payroll professionals in getting it right, we have put together a short overview of how to calculate the Benefit in Kind value for loans.

As always, your situation may be more complex so check out the HMRC guidance and employment manuals for more information.

If you / your client provides loans to employees, those loans may need to be reported on a P11D by 6 July.

Loans no higher than £10,000

If an employee is in receipt of a loan which is no more than £10,000, this is not reportable on a P11D.

 

Loans higher than £10,000

Any loans provided to an employee which total more than £10,000 within a tax year, need reporting on a P11D.

There are two methods of calculation which can be used to calculate the value needing to be reported via the P11D, both of which can be found within Income Tax (Earnings and Pensions) Act (ITEPA) 2003:

  1. normal method of calculation (averaging) (section 182)
  2. alternative method of calculation (section 183).

 

Let’s look at the below examples to see the same scenario calculated in both ways:

  • employee receives a loan of £30,000 on 06/04/2023
  • employee pays off the loan on 05/06/2023
  • employee does not pay any interest during the loan period.

 

Normal method of calculation (averaging):

Step 1

  • find the maximum amount outstanding on the
    • 5 April before the start of the tax year in question, or
    • if the loan was made during the year, the date on which it was made
      • the answer here is £30,000.
  • find the maximum amount of the loan outstanding on
    • 5 April within the year of assessment, or
    • if the loan was made during the year, the date on which it was repaid
      • the answer here is £30,000.
  • add together the maximum amounts found at 1 and 2 and divide the result by two - this is the average loan
    • the answer here is £30,000 + £30,000 / 2 = £30,000.

Step 2

  • calculate the average official rate of interest for the period covered in step 1
    • for 2023/2024, the official rate of interest is 2.25%.

Step 3

  • multiply the average loan (£30,000) by the average official rate of interest (2.25%)
  • multiply by the number of whole months for which the loan was outstanding in the year (for the purpose of the calculation, months begin on the sixth day of the calendar month)
  • then divide the result by twelve
    • £30,000 * 2.25% * 2 / 12 = £112.50.

Step 4

  • finally, deduct any interest that was paid by the employee in respect of the loan for that year
    • £112.50 - £0.00 = £112.50 to be reported on a P11D.

 

Alternative method of calculation:

This method is to be used when elected by an employee or an inspector. An inspector may need to be informed where the normal method is likely to put tax at risk, such as where there are large fluctuations in loan amount during a tax year.

Step 1

  • for each day when the loan was outstanding find the maximum amount of the loan and multiply this by the official rate of interest for that day
    • £30,000 * 2.25% = £675

Step 2

  • Add together each of the amounts from step 1.
    • £675 * 58 days = £39,150

Step 3

  • Divide the result of step 2 by the number of days when the loan was outstanding
    • £39,150 / 366 days = £106.97

Step 4

  • Finally, deduct from the result of step 3 any interest paid on the loan
    • £106.97 - £0.00 to be reported on a P11D.

 

The employment income manual has some helpful guidance pages to assist you in the above two calculation methods:


Information provided in this news article may be subject to change. Please make note of the date of publication to ensure that you are viewing up to date information.