Official interest rate increased
The official interest rate has been increased from 5 per cent to 6.25 per cent.
The rate is used to determine whether a loan to an employee is a ''taxable cheap loan", and therefore subject to income tax.
If an employer lends money to an employee at no interest, or at an interest rate lower than the official rate, the cheap loan is a taxable benefit. The tax charge applies to the "cash equivalent" of the benefit. Generally, for any tax year, the cash equivalent is the difference between the interest on the loan at the official rate, and the interest paid on the loan.
There are two methods of calculating the cash equivalent. The "default" method uses the average balance of the loan for the tax year. Under the alternative method, interest is calculated on a day-to-day basis. The taxpayer may use whichever method favours him. The default method applies unless the taxpayer elects for the alternative. Where the default method gives an unlikely result, HMRC may insist on the alternative method.
The new rate takes effect from 6 April 2007. The previous rate (5 per cent) has been in place since January 2002. The increase means that there will be higher tax bills for certain employees who have taxable cheap loans with their employers. It also affects other cases where, even though an employee has not taken a loan, he has been deemed by legislation to have done so. An example of such a situation is where an employee is deemed to have taken out a "notional loan" because he has acquired employment-related securities for less than market value.
References: Taxes (Interest Rate) (Amendment) Regulations 2007, S.I. 2007/684; Income Tax (Earnings and Pensions) Act 2003 Part 3, Chapter 7.
The rate is used to determine whether a loan to an employee is a ''taxable cheap loan", and therefore subject to income tax.
If an employer lends money to an employee at no interest, or at an interest rate lower than the official rate, the cheap loan is a taxable benefit. The tax charge applies to the "cash equivalent" of the benefit. Generally, for any tax year, the cash equivalent is the difference between the interest on the loan at the official rate, and the interest paid on the loan.
There are two methods of calculating the cash equivalent. The "default" method uses the average balance of the loan for the tax year. Under the alternative method, interest is calculated on a day-to-day basis. The taxpayer may use whichever method favours him. The default method applies unless the taxpayer elects for the alternative. Where the default method gives an unlikely result, HMRC may insist on the alternative method.
The new rate takes effect from 6 April 2007. The previous rate (5 per cent) has been in place since January 2002. The increase means that there will be higher tax bills for certain employees who have taxable cheap loans with their employers. It also affects other cases where, even though an employee has not taken a loan, he has been deemed by legislation to have done so. An example of such a situation is where an employee is deemed to have taken out a "notional loan" because he has acquired employment-related securities for less than market value.
References: Taxes (Interest Rate) (Amendment) Regulations 2007, S.I. 2007/684; Income Tax (Earnings and Pensions) Act 2003 Part 3, Chapter 7.
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