How are interest free loans taxed?

Hi Niki

The answer depends on how big the loan is and how long it remains unpaid. Under current UK tax law you can have a interest free loan from your employer of up to £5,000 ... tax free!

If the loan is over £5,000 then you will be taxed based on the amount and how long it remains unpaid. The taxman has an official rate of interest that it uses to work out how much tax you are going to pay. This used to be 5% but changed to 6.25% in 2007 and was reduced to 4.75% in March 2009. You don't pay this official interest - but you do pay tax on the official interest. To work this out you need to know your highest tax rate (ie 20%, 40% or 50%) and multiply this by the amount of official interest.

So if you have a £5000 loan = no tax bill. If you have a £10,000 loan and it last for 6 months and you are a 20% taxpayer then the calculation is £10,000 x 4.75% x 6/12 x 20% = £47.50

Jonathan