Navigating the Continued 2.25% Director’s Loan Rate into 2024/25

Apr 17, 2024

To the surprise of many HMRC has kept the official rate of interest (ORI) for beneficial loan arrangements like director’s loans at 2.25% for the second year running.

In a recent press release, HMRC has confirmed that the official rate will not be increased for director’s loans outstanding throughout the tax year 2024/25 using the normal averaging method of calculation, keeping it at 2.25% for the second year running, despite a base interest rate of 5.25%.

Historically this seems an odd move as the last time Bank of England interest rates were comparable with today’s rate in the mid-2000s, HMRC’s official rate of interest was in proportion against base rates.

When considering that the HMRC interest rate for late tax payments has been 7.75% since August 2023, the decision to hold the rate is even more surprising. For example, when the BoE base rate fluctuated between a rate of 5.25% and 5.75% in the 2007/08 tax year, the ORI was set at a level of 6.25% in the same year and 6.1% in the subsequent tax year.’

What does this mean for Directors?

Directors can benefit from a rather favorable tax environment if they opt for directors’ loans instead of dividends, which have now seen their tax-free threshold drop down to just £500.

A director’s loan is when a company director (or other close family members) is loaned money from their company that is not a salary, dividend, or expense repayment, money previously paid into or lent to the company.

For loans below £10,000 as long as the interest rate charged by the employer/company is not lower than the official rate of interest there is no additional tax liability.

Directors and employees with ‘cheap’ loans, where generally the interest rate charged by the employer on the loan is either nil or below the ORI, can now breathe a sigh of relief for at least another tax year.

This is because where a loan, in excess of £10,000, is provided by a company to an employee or director, a taxable benefit arises if the interest rate charged is less than the ORI.

For example, if the director paid interest at a rate of 2.25% for the 2023/24 tax year on a £100,000 loan, no benefit or associated tax liability would ordinarily have arisen for that tax year. Where the loan is provided interest-free they would have a taxable benefit calculated as an annual tax charge on 2.25% of the loan for the 2023/24 tax year.

If the director’s loan is not repaid within nine months and one day of the end of the corporation tax accounting period, then HMRC charges additional tax on the loan at 33.75%, or 32.5% if the loan was made before 6 April 2022. The additional corporation tax is known as Section 455 tax.

For director’s loans over £10,000 in value, companies must treat them as benefits in kind and they have to be reported on self-assessment tax returns. Tax may be payable on the loan at the official rate of interest.

If you have any questions on how this topic affects you, get in touch on 01902 711370 or email enquiries@uklandlordtax.co.uk.

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