The benefit of a beneficial loan is not chargeable to tax or liable for Class 1A NICs if the total balance outstanding on all loans does not exceed £5,000 throughout the tax year.
Strictly it is necessary to calculate and consider the total balance outstanding on all of an individual's beneficial loans on a day to day basis. In practice many loans decrease steadily from the date they are taken out. If so the maximum balance in any year will not exceed the balance at the beginning of the year (or, if later, the date when it was taken out). In such cases it is possible to know whether the exemption applies without knowing the maximum balance day by day.
Interest accrued is not added to the balance of a loan outstanding until the interest falls due for payment.
Qualifying loans
Where the small loans exemption is not due because the total balance of all loans exceeded £5,000, but this limit would not have been exceeded if it were not for the existence of one or more qualifying loans, only those qualifying loans are taken into account as a chargeable benefit.
For example if a director has three interest free loans from an employer as follows
- qualifying loan - maximum outstanding balance in the year £50,000
- non-qualifying loan - maximum balance outstanding in the year £3,000
- non-qualifying loan - maximum balance outstanding during the year £2,000
since the maximum total balance outstanding in the year exceeds £5,000 the small loans exemption is not due. But apart from the qualifying loan the maximum balance would be £5,000. Consequently the small loans exemption applies to the two non-qualifying loans and only the qualifying loan gives rise to a chargeable benefit.
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