Director's Loan & Benefit in Kind: A Case Study
Let's explore the personal tax implications when a director takes a large, interest-free loan from their company.James is a director of his own company. On the first day of the tax year, he borrows £20,000 from the company to help with a house deposit. He does not pay any interest on the loan.
The Benefit in Kind Rule
Because the loan is over £10,000, and James is not paying a commercial rate of interest, it is treated as a taxable benefit in kind.
Calculating the Benefit
The value of the benefit is calculated using HMRC's 'official rate of interest'. Let's assume this is 2.25%:
- £20,000 (Loan) x 2.25% (Official Rate) = £450
This £450 is the 'cash equivalent' of the benefit.
The Tax Consequence
- For the Company: The company must report this £450 benefit on a P11D form and pay Class 1A National Insurance on it (£450 x 13.8% = £62.10).
- For James: The £450 benefit is added to his other income for the year and is subject to Income Tax at his marginal rate. If he's a higher-rate taxpayer, he will pay £450 x 40% = £180 in tax on this benefit. This is separate from the s455 tax the company might have to pay if the loan isn't repaid on time.