A long-standing employee is leaving and, as a reward for their past loyalty, you want to waive the balance on their staff loan. How should you treat this for tax and NI purposes?
Taxable and non-taxable loans
As an employer you might lend an employee money, say, to buy their annual travel pass. If the loan is interest free or you charge interest at a rate which is less than HMRC’s official rate (2.25% simple per annum for 2023/24) it can count as a taxable benefit in kind, but there are exceptions. For example, loans of up to £10,000 aren’t taxable benefits. However, the tax and NI consequences of writing off all or part of a loan are different.
Writing off a loan
There may be situations where you decide to write off or waive the balance of a loan, e.g. where the employee stops working for you and you don’t expect to be able to recover the amount owed. Loans waived always count as taxable income for the employee even if the loan wasn’t a taxable benefit in kind under the rules we’ve already mentioned. There are just two exceptions. They are where:
- the loan was to an employee’s relative and the employee gained no personal benefit from the loan being waived; and
- the loan is waived following the death of an employee. If a loan is waived because an employee is critically ill and won’t return to work the exception doesn’t apply, i.e. it’s taxable.
Tip. If your intention is that the loan is waived, that is, you give up your legal right to repayment rather than just suspend attempts to collect it, you should, wherever possible, notify the employee in writing that they no longer owe anything.
Taxable loan waivers
Where you waive an employee’s loan it will almost always count as taxable earnings rather than as a taxable benefit. The latter is only likely to apply where your business includes making loans to the public and the employee’s loan was on similar terms and conditions.
Trap. The difference between a loan being earnings rather than a benefit is important for NI purposes. As earnings, Class 1 NI (employees’ and employers’) is payable, whereas as a benefit only the employer pays Class 1A.
Waiving a loan on death
In the unhappy situation that an employee dies and you write off their loan it doesn’t count as either earnings or as a benefit in kind. However, if the employee missed any repayments before their death and interest was payable on the loan, any unpaid interest which you waive will count as a taxable benefit.
Tip. Where an employee is seriously ill and may not survive, if you’re considering waiving a loan you should wait to see whether they recover. If, as a goodwill gesture, you waive the loan while they are ill it will be taxable and liable to NI whether or not they survive. If they don’t survive, waiving the debt at that point will mean there’s no tax or NI for you or their estate.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.