Cheap employee loans earn a break from tax

IF YOU are negotiating a package of perks at work, an interest-free loan could become an even more attractive option. From 6 April, there will be no tax charged if the loan is less than pounds 5,000.

Employers have traditionally given employees interest-free loans to buy travel season tickets. The loans are taxable as a benefit in kind for employees earning pounds 8,500 a year or more.

The tax charge is based on the difference between the interest paid by the employee (if any) and the interest that would have been paid at the Inland Revenue's 'official rate of interest' - currently 7.5 per cent.

It can be a tortuous business working out how much the tax charge is. To avoid costs for employers, employees and the Inland Revenue, loans provided by an employer are currently not taxed where the benefit is less than pounds 300.

This means that in most cases a loan of under pounds 4,000 is exempt from tax in 1993/4. However, from 6 April the system is changing.

There will be a new exemption for small loans. It will apply where all the employee's cheap or interest-free loans, excluding those that qualify for tax relief, are no more than pounds 5,000.

In simple terms, this means if you have a cheap mortgage from your employer and an interest-free pounds 2,000 loan to buy a season ticket, you will pay tax on the benefit of the mortgage but not on the benefit of the season ticket loan.

The change in the rules should keep most season ticket loans outside the tax net.

Brian Friedman, head of employee benefits at the chartered accountants Arthur Andersen, said: 'If the whole amount of the loan is outstanding throughout the year, then it looks more generous.

'But in many cases, you repay monthly and it then depends on how quickly you pay it back.'

Bob Rothenberg, a partner in Blick Rothenberg, the firm of chartered accountants, says a tax saving in 1994/5 could be made on a current loan of more than pounds 5,000 by reducing it to pounds 5,000 before 6 April.