CheckLists.Tax (beta)
M7. Loan to employee
EMPLOYMENT INCOME TAX
General earnings
Benefit in kind
- Loan not usually earnings
General rule
- As a general proposition, the advancement of a loan will not be a payment of earnings in the amount of the principal (Currell, §94):
(1) There is an obligation to repay meaning that the benefit is limited to the use of the funds (§95).
(2) What is taxable is the convertible value - it is not the loan itself that can be turned to account, but the use of the funds (§96).
- Acknowledgment that there is a longstanding practice of directors drawing on loan accounts without immediate earnings liability in Currell (§106).
Limited circumstances where it may be earnings
- Principal of a "loan" could be earnings if the repayment obligation was a sham:
- "[97] I do not exclude the possibility that, in some limited circumstances, the provision of a loan may amount to a payment of earnings in the amount of the principal of the loan. That would most obviously be in a case of sham or where it was otherwise never intended that the "loan" should be repaid, such that the true agreement is not one of loan (compare, for example, Antoniades v Villiers [1990] 1 AC 417)." (Currell)
- Control over whether/when the loan repayment will be required is not sufficient (Currell, §98).
- "Further, there is in any event no authority for the proposition that the fact that the borrower controls the lender is sufficient to alter the legal character of a loan. It is not. I would add that, were it otherwise, the legal status of the entirely commonplace transaction of a loan to a parent company could be called into question." (Currell, §98).
Legislation: ITEPA s.62;
Cases:
HMRC v. Currell [2026] EWCA Civ 445, Falk LJ;
HMRC manuals:
Commentary:
See also:
- Cash equivalent of employment-related cheap loan treated as earnings
- Cheap loan is one on which less than the official rate of interest is paid.
- Official rate prevents arguments over what would be a commercial rate of interest on an equivalent loan (EIM26103).
- Different official rate may apply for loan in foreign currency to person who normally lives in that country (s.181(2); EIM26105).
- Exclusion for loans made by individual in the ordinary course of personal relationships (s.174(5)).
- Treated as discharged on death (s.190).
Legislation: ITEPA s.174; s.175; SI 1989/1297;
Cases:
HMRC manuals:
Commentary:
See also:
- Applies to shadow directors
- Where company makes a loan and the recipient is not an appointed director, consider whether the individual is a shadow director (and, therefore, treated as an employee).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Applies to loans to relatives of employee (unless employee derives no benefit)
- Wide meaning: Relative is (1) spouse or civil partner; (2) parent or child or remoter relation in direct line of employee or spouse/civil partner; (3) brother or sister of employee or spouse/civil partner; (4) spouse/civil partner of remoter relation or brother/sister.
- Exclusion if loan is to relative and employee derives no benefit from it (s.174(5)).
Legislation: ITEPA s.174;
Cases:
HMRC manuals: EIM21742; EIM26112;
Commentary:
See also:
- Applies to loans from persons other than the employer (e.g. persons controlled by or controlling employer)
- Employer treated as making a loan if it arranges, guarantees or in any way facilitates the loan.
- HMRC say that employer funding EBT which makes a loan is the employer facilitating the loan.
- Applies to loans from entities that (1) the employer controls; (2) control the employer; (3) are under common control with the employer.
- Applies to loans from persons having a material interest in a close company which was the employer, controlled the employer, or was controlled by the employer.
- Close company does not include a non-resident company - ITEPA Schedule 1, Part 2, leading to ITA 2007, s.989, leading to the ordinary meaning in CTA 2010.
- Applies to loans from persons having a material interest in a company or partnership that controls such a close company.
- Close company does not include a non-resident company - ITEPA Schedule 1, Part 2, leading to ITA 2007, s.989, leading to the ordinary meaning in CTA 2010.
Legislation: ITEPA s.173(2)(b); s.174(2);
Cases:
HMRC manuals: EIM26110; EIM26113;
Commentary:
See also:
- Applies to prospective employees but not former employees
- Charge ceases if the individual ceases to be an employee.
Legislation: ITEPA s.174(3);
Cases:
HMRC manuals: EIM26102;
Commentary:
See also:
- Potential charge if loan recipient later becomes an employee
- Leaving a loan repayable on demand outstanding after an individual becomes an employee could amount to "any form of credit".
Legislation: ITEPA, s.173(2)(a);
Cases:
HMRC manuals:
Commentary:
See also:
- Loan to employee who later becomes UK resident or starts working in the UK
- The charge will apply if made in contemplation of the employee working or living in the UK and are in respect of that period (EIM26105).
- The charge will apply to a loan made when the employee was not chargeable to UK tax if, after the employee's earnings are chargeable to UK income tax, the employer in any way facilitates the continuation of an existing loan (EIM26105).
- HMRC say that the employer does not facilitate the loan merely because it is conditional on the employee continuing in employment, but would if the loan was conditional on the employer making regular payments to subsidise the interest, which it might cease (EIM26105).
Legislation: ITEPA s.16(2); s.173(2)(a);
Cases:
HMRC manuals: (EIM26105);
Commentary:
See also:
- Official rate for loan in Japanese/Swiss currency to person who normally lives in that country
- A loan made in Japanese/Swiss currency for the benefit of an employee who normally lives in that country and who has lived in that country at some time in the past 6 years is subject to a different official rate (Japan: 3.9%; Switzerland: 5.5%).
Legislation: SI 1989/1297, r.5(2);
Cases:
HMRC manuals: EIM26106;
Commentary:
See also:
NATIONAL INSURANCE CONTRIBUTIONS
- Benefit of cheap employment-related loan liable to Class 1A
- If an employee is liable to tax under the employment-related loans provisions in ITEPA, there will also be a Class 1A NICs charge on the employer (NIM12020).
Legislation:
Cases:
HMRC manuals: NIM12020 - Class 1: Calculating Class 1 NICs for Directors: Directors' loan accounts: Other liabilities;
Commentary:
See also:
- Regular withdrawals from overdrawn director's loan account treated as earnings liable to Class 1 NICs
- Class 1 NICs can apply to sums paid to directors that are not earnings but are paid on account of or by way of advance of earnings (SSCR, r.22(2)).
- HMRC say that there is a strong inference that regular withdrawals from an overdrawn director's loan account are on account of earnings where the pattern has existed for a period of time (NIM12018).
Legislation: SSCR 2001, s.22;
Cases:
HMRC manuals:
Commentary:
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