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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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The benefits code: beneficial loans: calculation of the cash equivalent: example

Section 182 ITEPA 2003

This example shows how to calculate the cash equivalent of a beneficial loan using the averaging method (see EIM26210), and how to calculate the average official rate for part of a year.


A director has an interest-free loan from his company. The amount outstanding at the previous 5 April was £20,000. He makes regular repayments until 20 August, when he repays the amount then outstanding of £16,000. The averaging method of calculation applies as follows (the official rates for sterling loans are, for this example, 4.5% from 6 April to 5 July and 5.5% thereafter).


Step 1 - calculate the average amount of the loan outstanding.

Maximum amount outstanding on previous 5 April £20,000    
Maximum amount outstanding on 20 August £16,000    
Add together £36,000 divided by 2 = £18,000

Step 2 - calculate the average official rate for the period 6 April to 20 August (both dates inclusive).

6 April to 5 July = 91 days at 4.5%
6 July to 20 August = 46 days at 5.5%
Total 137 days  

Therefore the average official rate is:

91/137 x 4.5% add 46/137 x 5.5% = 4.83%

Step 3 - calculate the amount of interest payable at the official rate for the period for which the loan was.

(£18,000 x 4.83% x 4) (note) / 12     = £289 (rounded down)

Note: 4 is the number of whole months during which the loan was in existence in the year of assessment, see EIM26217).

Finally, deduct any interest paid by the employee from the £289 that is the cash equivalent of the loan benefit.