From 6 April 2025, HMRC's official rate of interest will increase. In this brief article, we will provide guidance for employers on which agreements will be affected and what they should look out for.
What has changed?
From 6 April 2025, HMRC's official interest rate will increase from 2.25% to 3.75% per annum. This is the first time that the interest rate has gone up in two years.
Why is this relevant?
HMRC use this interest rate to consider whether a loan to employees is a taxable cheap loan and, as such, if it should treated as a benefit in kind.
Who will be affected?
If your taxable cheap loan has an interest rate of less than 3.75% and the loan value is £10,000 or more, this will now be categorised by HMRC as a benefit in kind and tax charges will apply.
This means that the employee will have an income tax liability on the benefit in kind (currently reportable and payable through the self-assessment system) and the employer needs to report it on a P11D and pay Class 1A National Insurance Contributions (NICs) on the value of the benefit.
It's also worth noting that if the loan agreement has the interest rate defined as the HMRC official rate, this may automatically increase from 2.25% to 3.75% – meaning that while no additional tax will be due, the interest payable will increase.
Next steps
We recommend that employers review their loan arrangements with employees to:
- check whether the interest increases automatically;
- check whether the interest is fixed at a reduced rate (perhaps the previous official rate of interest at 2.25%) and prepare for any class 1A NICs liability; and
- consider whether any changes are needed to the loan documentation.
This article was co-authored by Trainee Taylor Foster.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
