Employee loan letter

Where an employee or a director owes their employer more than £10,000 at any point during a tax year, a taxable benefit in kind arises. You need to work out the cash equivalent of this. Use this letter to write to any employees with loans to explain the basis you have used to calculate their taxable benefit.

Two methods

The cash equivalent is worked out in one of two ways:

• an average of the amount of loan or other debt at the start of the tax year (or if later when a debt/loan first arose), and at the end of the year. The cash equivalent is the average multiplied by the official rate of interest; or
• the alternative precise method. This applies the interest rate on the balance of the debt/loan on each day.

The first method applies unless the employee or director opts to use the alternative. Our Employee Loan Letter provides the employee/director with information about this calculation.

How to use

When you complete your P11D reporting after the end of the tax year, identify any employees who have a taxable beneficial loan, and give them this letter with their copy of the P11D before you submit it to HMRC (the deadline for submitting forms P11D is 6 July following the end of the tax year). This gives you the opportunity to amend the forms prior to filing. However, the employee may send notification direct to HMRC if they prefer. In that case you don’t need to amend the P11D.

Note. The time limit for employees and directors to elect for the alternative precise method is twelve months from 31 January following the end of the tax year. For example, for 2022/23 an election must be submitted to HMRC no later than 31 January 2025.