Introduction
If a director or employee has a loan from the company and:
- The loan exceeds £10,000 at any point in the tax year, and
- No interest is paid, or interest is paid below HMRC’s official rate,
then the difference is treated as a taxable benefit and must be reported on the P11D form.
How is the benefit calculated?
There are two accepted methods for calculating the benefit-in-kind:
- Average Method (common method unless repayment patterns are irregular):
- 2024/25 HMRC official rate: 2.25%
- Applies if loan is steady throughout the year (no major fluctuations).
Example (2024-25 tax year)
A director has:
- £30,000 loan on 6 April 2024
- £40,000 loan on 5 April 2025
- Pays no interest
- Average balance = (£30,000 + £40,000) / 2 = £35,000
BIK = £35,000 × 2.25% = £787.50
This £787.50 is reported as a benefit on the P11D, and:
- The director pays income tax on this amount, and
- The employer pays Class 1A NICs at 13.8% on the same amount.
- Strict Method (more precise, if loan changes significantly):
- Calculate the daily balance for each day of the tax year.
- Apply the daily interest using HMRC’s rate to each day.
- Total the interest across the year.
Example (2024-25 tax year)
A director has the following loan transactions from their company:
Step 1: Calculate interest per day
Step 2: Calculate each period
Period 1: 6 Apr – 30 Jun (86 days)
Loan: £50,000
Interest: 50,000×0.0000616438×86 = £265.08
Period 2: 1 Jul – 30 Nov (153 days)
Loan: £70,000
70,000×0.0000616438×153=£660
Period 3: 1 Dec – 5 Apr (126 days)
Loan: £60,000
60,000×0.0000616438×126= 466.01
Total BIK: £265.08+£660.59+£466.01=£1,391.68
This £1,391.68 is reported as a benefit on the P11D, and:
- The director pays income tax on this amount, and
- The employer pays Class 1A NICs at 13.8% on the same amount.
