H M Revenue & Customs “HMRC” have announced that from 6 April 2025 the Official Rate of Interest “ORI” is set to increase from 2.25% to 3.75%, a significant jump from the level of rates across the previous few years. This is expected to have a significant impact for directors and employees who loan cash from companies/their employers that they own or work for, as well as on the companies/employers themselves.
What is the official interest rate and why is it important?
The ORI is important as it sets out an interest rate acceptable by HMRC in relation to director and employee loans from companies that they are connected to. If interest equivalent to the ORI is not charged on a loan, a taxable benefit may arise on the difference, subject to income tax on the loan holder and national insurance on the employer.
HMRC reviews and sets the ‘ORI’ annually. While the ORI will fluctuate in line with general interest rates, the actual figure is generally significantly lower than wider interest rates, and this has been proven over the past few years where large hikes in the Bank of England base rate were not matched by HMRC with their ORI. The gap between these two rates have therefore been reduced significantly as of 6 April 2025.
What does this mean for me as an individual receiving a loan?
If, as an employee or director of a company, you have received a loan from that company/employer on non-commercial terms, there is a possibility that you will have a taxable benefit arise which will be subject to income tax, if this has been received interest free or at a reduced rate of interest to the ORI.
However, there’s good news for individuals receiving more modest loans. If the loan, or the total of loans made to you in the year by the company, is no more than £10,000 then there will be no taxable benefit regardless of the interest rate charged.
The impact of the increase to the ORI means that employees / directors either will be required to pay more interest on these loans, or otherwise be subject to larger income tax charges as the amount of the taxable benefit increases.
What does this mean for companies and employers?
Companies and employers will now need to review the loans that it provides and consider if the increase in ORI means that it would need to increase the rate of interest it charges on these, or otherwise the impact on the taxable benefit that arises on a reduced or zero interest loan to its employees and directors.
Employers are subject to Class 1A National Insurance on the value of the taxable benefit that arises, so the charge on this will be due to increase. This is alongside an equivalent hike in the rates of Class 1A National Insurance from 13.8% to 15% from 6 April 2025. Combined, this represents a significant increase in costs for employers offering these loans.
What is Section 455 tax and how does this interact with loans?
Section 455 tax is an additional tax charge payable by companies, and relates to loans that a close company provides to its participators. This essentially covers loans from smaller companies to its shareholders and other key individuals who have a right to income over the company.
When a company makes a loan to a participator which remains outstanding more than nine months after the accounting period in which it was made, 33.75% of the outstanding amount will be payable by the company to HMRC. This is the section 455 charge.
If the participator then repays the loan to the company the section 455 charge is then repaid to the company, although this repayment may not be immediate.
Although the increase in the ORI does not impact the rate of Section 455 tax, it should still be borne in mind when companies consider making loans to shareholders which may get caught by this charge.
Get in touch
For further information and advice on any of the topics covered, or if you need help on considering the impact of change to ORI, please get in touch with our team, who will be more than happy to assist you.