From 6 April 2025, HMRC increased the official rate of interest on employment-related loans from 2.25% to 3.75%, marking its highest level in more than a decade. The move also introduced quarterly rate reviews, adding new complexity for employers and company directors.
For most of the 21st century, the Bank of England’s base rate remained relatively stable. But recent years have seen a steep rise as the Bank acts to control inflation, and HMRC has finally caught up.
Our blog in May 2024 explained one of the ways the base rate can be relevant for tax purposes and, as highlighted then, the rate at the time was still very attractive. This is no longer the case, and the implications for company loans are now more significant.
For directors and employees benefiting from “cheap loans” from their companies, this change can have an impact on their tax position.
What is a beneficial loan?
A beneficial loan arises when a company lends money to an employee or director either interest-free or at a rate below HMRC’s official rate.
If the total outstanding balance exceeds £10,000 at any point in the tax year, the difference between the interest charged and the official rate is treated as a benefit in kind (BIK) and taxed accordingly.
Why the increase matters
The jump from 2.25% to 3.75% means that the taxable benefit on such loans might increase substantially. For example:
- A £100,000 interest-free loan now attracts a deemed interest benefit of £3,750, up from £2,250 last year.
- For a 40% taxpayer, this equates to an additional £600 in income tax.
- Employers also face higher Class 1A NICs, now at 15%, up from 13.8%.
For those with outstanding director or employee loans, these changes may already be affecting tax calculations.
Quarterly reviews from April 2025 - added complexity for employers
Since April 2025, HMRC have been reviewing the official rate quarterly rather than annually. This shift means employers and payroll teams must now monitor rate changes throughout the year and apply the correct rate for each period.
Rate updates take effect on 6 April, 6 July, 6 October, and 6 January, so ongoing review is key to ensuring compliance and accurate reporting.
Directors’ loans - A tax-efficient strategy or a trap?
It is worth noting that many directors use loans from their companies as a flexible alternative to dividends. Whilst this can be tax-efficient, especially when interest is charged at or above the official rate, a separate tax charge can also loom large if the loan remains outstanding nine months after the company’s year-end – triggering a 33.75% corporation tax charge.
Although this charge is refundable once the loan is repaid, it can create cash flow issues and administrative burden, so it is important to stay ahead of the game.
What should you do now?
With HMRC finally aligning its rates more closely with market conditions, now is the time to:
- Review all loan agreements – check whether interest rates are fixed or linked to HMRC’s official rate
- Consider charging interest at or above 3.75% to avoid a benefit in kind
- Evaluate alternatives – could a dividend or salary be more tax-efficient?
- Prepare for quarterly rate changes – update payroll systems and internal processes.
For reference, see HMRC’s official beneficial loans guidance.
Final thoughts
Cheap loans from companies have long been a useful tool for directors and employees, but with HMRC’s rate hike and the move to quarterly reviews, the landscape has shifted.
What was once a tax-efficient perk could now carry a heavier tax cost and, as a minimum, a greater compliance risk.
If you have not reviewed your arrangements since the rate change, it is worth doing so now to stay compliant and avoid any surprises, so early discussion with your tax adviser is recommended.
The next step
If you require further advice regarding the above, please get in touch with Ian Dickinson or your usual UHY tax adviser.
