The cash equivalent benefit is the difference between:
- the interest that would have been payable on the loan had it been worked out using the official rate of interest, and
- the amount of interest that was paid during the year. In this case none.
A loan of £25,000 is taken. The current official interest rate is 3.25%, therefore interest of £812.50 would have been payable using the official interest rate. This makes the cash benefit £812.50 for the year.
- For a basic rate (20%) tax payer this would mean paying £162.50 in tax for the year
- A higher rate (40%) tax payer would pay £325 in tax.
In practice an average loan amount will be used as the loan decreases through the year as repayments are made. This is done by adding the outstanding balance at the beginning and end of the tax year and dividing it by 2, this figure would then be used to establish how much interest and therefore tax should be paid.
The tax would be collected through an adjustment to your PAYE code so there are no calculations for you to make and no requirement to start completing Self assessments if you don’t already do so. The loan will be listed on your P11D.
These figures are for illustration only and are not a substitute for seeking personalised professional advice.
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