HMRC internal manual

Employment Income Manual

EIM26221 - 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.

Facts

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).

Calculation

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
  • £20,000 + £16,000 = £36,000 ÷ 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 × 4.5%
  • 6 July to 20 August = 46 days × 5.5%
  • total number of days = 137 days

Therefore the average official rate is: (91 ÷ 137) × 4.5% + (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 × 4.83% × 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.