From 6 April 2025, HMRC will increase the official interest rate for beneficial loans from 2.25% to 3.75% – —the highest since 2014. While this increase was calculated using the ‘precise method’, the ‘averaging method’ rate for 2025/26 remains unconfirmed at 2.25%, making it more favourable than commercial loan rates.
Directors who are also shareholders often use company loans instead of dividends, which could be taxed at up to 39.35%. However, if these loans aren’t repaid within nine months of the company’s accounting period, the company faces a tax charge of 33.75% on the balance.
Beneficial loans apply when directors, employees, or their relatives receive cheap or interest-free loans due to their employment. The taxable benefit is the difference between interest at the official rate and any interest paid. The recipient is still taxed on the benefit if a loan is written off, regardless of the original loan terms.
The averaging method calculates interest based on the loan balance at the start and end of the tax year. In contrast, the precise method determines interest daily using the highest outstanding balance.
With rates rising, directors and employees should carefully consider loan arrangements to avoid unexpected tax charges.
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