HMRC freezes director’s loan interest at 2.25%

HMRC freezes director’s loan interest at 2.25%

Apr 17, 2024

In a surprise move, the official rate of interest (ORI) for beneficial loan arrangements like director’s loans will be held at 2.25% for the second year running

HMRC has confirmed that the official rate will not be increased for director’s loans outstanding throughout the tax year 2024/25 using the normal averaging method of calculation, keeping it at 2.25% for the second year running, despite a base interest rate of 5.25%.

This seems an odd move as last time Bank of England interest rates were comparable with today’s rate in the mid 2000s, HMRC’s official rate of interest was scalable against base rates.

Bearing in mind the HMRC interest rate for late tax payments has been 7.75% since August 2023, the decision to hold the rate is even more surprising.

RSM tax partner Chris Etherington said: ‘It remains unclear why the ORI has not been increased in line with the BoE base rate and the boat may have been missed on two occasions in terms of increasing tax receipts.

‘The Treasury could have either benefitted from larger tax receipts on benefits in kind with a higher ORI or potentially tax of up to 39.35% on dividends used to repay those loans.

‘The ORI looks particularly peculiar when compared to what has happened in the past when the BoE base rate has been at a similar level. For example, when the BoE base rate fluctuated between a rate of 5.25% and 5.75% in the 2007/08 tax year, the ORI was set at a level of 6.25% in the same year and 6.1% in the subsequent tax year.’

So directors can benefit from a rather favourable tax environment if they opt for directors’ loan instead of dividends, which after all have seen their tax-free threshold slashed to £500.

A director’s loan is when a company director (or other close family members) is loaned money from their company that is not a salary, dividend or expense repayment, money previously paid into or lent to the company.

For loans below £10,000 as long as the interest rate charged by the employer/company is not lower than the official rate of interest there is no additional tax liability.

Etherington added: ‘Directors and employees with ‘cheap’ loans, where generally the interest rate charged by the employer on the loan is either nil or below the ORI, can now breathe easy for at least another tax year.

‘This is because where a loan, in excess of £10,000, is provided by a company to an employee or director, a taxable benefit arises if the interest rate charged is less than the ORI.

‘For example, if the director paid interest at a rate of 2.25% for the 2023/24 tax year on a £100,000 loan, no benefit or associated tax liability would ordinarily have arisen for that tax year. Where the loan is provided interest-free they would have a taxable benefit calculated as an annual tax charge on 2.25% of the loan for the 2023/24 tax year.’

If the director’s loan is not repaid within nine months and one day of the end of the corporation tax accounting period, then HMRC charges additional tax on the loan at 33.75%, or 32.5% if the loan was made before 6 April 2022. The additional corporation tax is known as section 455 tax.

For director’s loans over £10,000 in value companies must treat them as benefit in kind and they have to be reported on self assessment tax returns; tax may be payable on the loan at the official rate of interest.