Lend Us a Hand!

Many people struggle to manage their budget and ask for a loan from their employer. A reasonable employer will often consider it and it can be very helpful.

However, as with so many things in employment, there can be some unexpected pitfalls and you need to be aware of them.

I was prompted to think about this because a client wanted advice about an employee who is asking for a loan of £1000. He has been unwell and is now returning to work four days a week. The business paid him full pay for most of his absence, but he was on SSP for a month at the end. Understandably he might need a bit of help managing his finances initially. The employer is not unwilling, but fears this particular employee might want to extend his loan and it does not want to get caught in a permanent doom loop of lending.

I have suggested that they talk to the employee to help him review his budget and see where he can make savings. Just borrowing money is not always the answer. I have sent them a list of small tried-and-successfully-tested actions that can be taken to cut costs. If he can make some savings the size of the loan can be reduced and the length of time he has to rely on top-ups can be shortened.

If you want to agree to make a loan to an employee, consider the following:

If you make a loan to an employee which is to be repaid via deductions from salary, make sure you have a written and signed agreement between you setting out the arrangements and permitting you to make the deduction.

It doesn’t usually matter what the loan will be used for. You can make a loan to an employee for any purpose. It could be to support a struggling employee, but loans can also be a form of benefit. For example, even now in this post-pandemic WFH world, employers still make loans for season tickets on a low-cost or interest-free basis.

A loan given at a rate of interest which is equal to or higher than HMRC’s official rate of interest does not need to be reported and if both the loan period and the interest rate are fixed there are no income tax or national insurance implications.

If the amount to be loaned is fairly low, the loan is not taxed, but if the loan is £10,000 or more it will be taxable as a benefit in kind.

Loans over £10,000 which are charged at a nil rate of interest or rate lower than HMRC’s official rate of interest are beneficial loans and must be reported on form P11d. You will have to pay Class 1A National Insurance on the cash equivalent of the beneficial loan and the employee will be taxed, usually through the reduction of their personal allowance by the ‘cash equivalent’ value.

Although every effort has been made to ensure the accuracy of the information contained in this blog, nothing herein should be construed as giving advice and no responsibility will be taken for inaccuracies or errors.

If you’re an employer with HR queries and problems, get in touch!


DISCLAIMER

Although every effort has been made to ensure the accuracy of the information contained in this blog, nothing herein should be construed as giving advice and no responsibility will be taken for inaccuracies or errors.

Copyright © 2023 all rights reserved. You may copy or distribute this blog as long as this copyright notice and full information about contacting the author are attached. The author is Kate Russell of Russell HR Consulting Ltd.