EIM44110 - Optional remuneration arrangements: taxable cheap loans

Section 175A ITEPA 2003

From 6 April 2017, the Income Tax and NICs advantages where benefits are provided through arrangements in which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.

Transitional provisions apply for a limited period. For further details see EIM44030.

Certain benefits in kind are excluded from the changes. For further details see EIM44130.

Where a taxable cheap loan is made available to an employee under an optional remuneration arrangement and the amount of salary or cash pay foregone is greater than the interest that would have been payable on the loan at the official rate of interest, the relevant amount to treat as earnings from the employment for the tax year is the :

  • the amount of salary or cash pay foregone, less
  • the amount of any interest paid on the loan for the tax year.

If the amount foregone is less than the interest that would have been payable on the loan at the official rate of interest then apply the normal rules for determining the amount treated as earnings from the employment.

Example

An employee has an interest-free loan of £15,000 made available by their employer outstanding for the tax year 2017 to 2018, when the official rate of interest is 2.5%. The interest that would be payable on the loan at the official rate of interest is £375. The employee agrees under an optional remuneration arrangement to waive his bonus for the tax year of £400 in return for which he does not have to pay interest on the loan. The amount of £400 foregone is greater than the interest of £375 that would be payable at the official rate of interest. The amount treated as earnings from the employment is £400. This is the amount of £400 foregone less any interest paid (nil) on the loan for the tax year.

Replacement loans – Section 186 ITEPA 2003

Where a taxable cheap loan is made available to an employee under an optional remuneration arrangement, and it is a replacement for a previous loan, the relevant amount to treat as earnings from the employment is worked out as above with the benefit of the replacement loan being the greater of:

  • the modified cash equivalent of the benefit of the loan, and
  • the amount foregone with respect to the benefit

A loan provided under an optional remuneration arrangement cannot replace a previously held taxable cheap loan. From 6 April 2017, make the calculation as if the loan is a new loan.

Aggregated loans – Section 187 ITEPA 2003

Where from 6 April 2017 a taxable cheap loan is made available to an employee under an optional remuneration arrangement, and might previously have been aggregated with earlier loans, the relevant amount to treat as earnings from the employment is worked out as above with the benefit of the loan being the greater of:

  • the modified cash equivalent of the benefit of the loan, and
  • the amount foregone with respect to the benefit

A loan made available under an optional remuneration arrangement cannot be aggregated with other taxable cheap loans.