A director or employee obtains a benefit by reason of their employment when he or she, or any of their relatives, is provided with a cheap or interest free loan. These loans are called beneficial loans. EIM26113 explains when a loan is by reason of the employment. You need to identify the loan before you can calculate the benefit.

An employee (unless in an excluded employment, see EIM20007) is chargeable to tax and the employer is liable for Class 1A NICs on the difference between the official rate of interest and interest, if any, paid. The benefit can be calculated using:

• the normal averaging method, described at EIM26210, or
• the alternative precise method described at EIM26230.

Look at EIM26250 to see how to deal with interest paid late by the employee.

It is not necessary for the loan to confer an advantage on the recipient for a chargeable benefit to arise. It is sufficient if the loan is made by reason of the employment.

There is no chargeable benefit on some qualifying loans. There are also other exempt loans.

An employee may also obtain a chargeable benefit when a loan is released or written off.

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