Introduction to this document

Employee loan agreement

Loans to employees provided for the purchase of season tickets, cars, bikes or any other purposes must have documented terms and conditions so that confusion is avoided at a later date. This benefits both the company and the employee. A loan document will also protect the company in the event that the relationship deteriorates/ends.

Loan agreement

The loan agreement should set out the name and address of the lender and borrower and must be signed by both parties. The amount borrowed and the terms of repayment should be included. Repayment of loans is usually made by deduction from salary but you can only do this if the employee has agreed by signing the Employee Loan Agreement.

Employee loans are often provided interest-free. This may give rise to tax consequences for the employee and the company (see below). Included is a clause which specifies that the employee is liable for any income tax that may be due by them.

If interest is to be charged, amend our employee loan agreement by setting out the rate to be used and the method of calculation, e.g. monthly, quarterly or annually.

There is also a clause that enables you to be able to deduct any outstanding loan balance from the final salary due when the employee leaves the company.

Tax considerations

In general, loans to employees of over £5,000 (in total for a tax year), which are interest-free, or at a rate of interest below the official rate, will incur an income tax charge on the difference between interest calculated at the official rate and the interest rate paid. These rules also apply to loans made to the spouse or relatives of the employee.

  • avoid the need to include employee loans on P11Ds by restricting the maximum loan to £5,000 or charging the official rate of interest
  • these rules also apply to loans to directors - if a director has an interest-free loan of more than £5,000 at any time during the year, then this will need to be included on their P11D and they will be liable to an income tax charge.