HMRC official rate interest only 2.25%

HMRC’s official rate of interest increased from 2% to 2.25% on 6 April 2023. The official rate of interest is used to calculate the taxable value of employment related loans and some employment related living accommodation. Historically, the official rate of interest would track closer to the Bank of England base rate, however in recent years HMRC have kept the rate lower. HMRC do review the official rate of interest on a quarterly basis but would normally set a single rate in advance for the whole tax year.

Should Directors / Shareholders take advantage of this lower interest rate?

The HMRC official rate of interest on employment related loans looks attractive compared to the Bank of England Base rate of 4.5% and potentially higher rates charged by lenders for unsecured loans.

Directors / shareholders, however, should be aware of additional tax charges on loans made to participators (broadly shareholders) of a close company. A s455 tax charge is levied on a company for any loans that remain outstanding 9 months after the end of the company’s accounting period. The s455 tax charge is calculated at a current rate of 33.75%, the same as the higher rate of tax on dividend income. This s455 tax charge is only repaid to the company, 9 months following the accounting period in which the loan is repaid or written off.

For example, Fred, the managing director and controlling shareholder of Bloggs Ltd, is loaned £100,000 interest free on 6 April 2023. No repayments are made in the accounting period ending 31 March 2024. Assuming no change in the HMRC official rate of interest the company would report a taxable benefit in kind on Fred’s 2023/24 P11d of £2,250 (2.25%). If Fred, then repays the loan in full before 31 December 2024 there would be no s455 tax charge on the company. However, the company would still report a taxable benefit in kind on Fred’s 2024/25 P11d for the 9 months that the loan was in existence.

If, however only £60,000 was repaid by Fred before 31 December 2024, leaving £40,000 outstanding on the loan, then there would be a s455 tax charge on the company of £13,500 (assuming a tax rate of 33.75%) which would be payable in addition to the company’s corporation tax liability for accounting period ending 31 March 2024.

At any time, if the company agrees to write off the outstanding loan, Fred would be taxed on the amount of the loan written off as an income distribution (dividend) arising at the date of write off.

For further information, please contact Gary Brown on 023 8046 1240.