Some companies lend funds to their directors to use for private purposes. This article looks at some of the tax implications for directors/employees.

When evaluating directors’ loans, there are two specific issues to consider:

  1. Benefit in kind – assessable primarily on the director as an employee.
  2. Loans to participators – a corporation tax charge assessable primarily on the company

Benefit in kind

An employer provides an employee or a director with a loan, but where a commercial interest rate is not charged, such loans are referred to as ‘taxable cheap loans’.

In such cases, the employee/director is assessed to a benefit in kind (BIK), which taxes the use of a loan from the employer without also having to pay interest at (at least) a commercial rate – which is defined by HMRC which currently stands at 2% per annum.

The employee will pay income tax on this BIK, while the company will pay employers’ Class 1A National Insurance contributions (NICs) on the value of the benefit.

Practical aspects

There is no BIK if the loan balance does not exceed £10,000 at any time in the tax year. However, as soon as it does, the loan is chargeable from when it first commenced – i.e., not just when it tripped over the £10,000 de minimis threshold.

There is no BIK charge if the loan has a qualifying purpose. Any interest charged would be wholly deductible for income tax purposes in the hands of the director (employee).

A good example might be a loan to purchase shares in an owner-managed company (typically a ‘close’ company, as defined); a bad example would be a loan to purchase a buy-to-let (BTL) residential property.

When a company lends money to its employees/directors
  • If the loan does not exceed £10,000 or
  • If the loan has a qualifying purpose.

How to calculate the BIK charge

There are two acknowledged methods of calculating the aggregate BIK charge:

  1. Normal averaging method:

Take the maximum balances on the first and last days of the loan (or the beginning or end of the tax year, if applicable) and average them, then charge by the number of complete tax months for which the loan is outstanding.

  1. Alternative precise method:

Broadly similar, but calculate the interest on a day-by-day basis.

Either the taxpayer or HMRC can adopt the latter precise daily method. Taxpayers might prefer the precise method where the loan is ‘u-shaped’, and borrowings over the bulk of the loan have been lower than the opening and closing positions might suggest; HMRC might plump for the precise method with ‘n-shaped loans’, where initial and closing values are relatively low.

Example: Which calculation method?

Kelly, who pays income tax at 40%, borrows £20,000 from her highly profitable company on 10 December 2021. She repays £5,000 on 31 March 2022, so £15,000 is still outstanding at the end of the 2021/22 tax year, on 5 April 2022. She has not borrowed from the business before, having previously settled all personal bills using her personal bank account, credit cards, etc.

Alternative 1: Normal Averaging Method

The loan balance at the close of 2021/22 is £15,000, and it has been outstanding since 10 December 2021, but that means only January, February, and March as complete tax months, the last ending 5 April 2022.

3 months/12 x 2% x (£20,000+£15,000)/2£87
Tax @ 40%£35

This will be Kelly’s 2021/22 tax bill. Kelly’s company will have Class 1A NICs of 13.8%, so it will cost the company £12.08 (net of corporation tax relief on the cost).

Alternative 2: Precise daily method:

£20,000 x 112 days/365 x 2% =£122.70
£15,000 x 5 days/365 x 2% =£4.10
Total BIK£126.80
Tax @ 40%£50

Kelly’s income tax bill for 2021/22, with the company having a Class 1A NICs liability of £17.50.

The standard averaging method effectively ‘starts’ on 6 January – the beginning of the first complete tax month; the precise daily method also applies the reduced closing balance for only five days, rather than including it in the average for the entire ‘term’ of the loan.


The personal tax cost of enjoying a taxable cheap loan BIK is relatively low; it will continue to apply annually until the loan is paid off (or the balance is brought forward and remains below £10,000 for the whole tax year). And it is likely to increase further as interest rates rise and statutory deductions start to take more out of profits, salaries and benefits.

If you want to learn more about the Inheritance Director Loans and Taxes, please contact us for more details.