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Overview
Interest‑Free and Low‑Interest Loans arise when an employer provides an employee with a loan on terms that are either interest‑free or at an interest rate lower than the official HMRC rate. Where the outstanding loan exceeds the statutory threshold of £10,000 at any point in the tax year (see other exemptions), a taxable benefit arises for the employee.
The taxable cash equivalent is calculated as the notional interest the employee would have paid at the official HMRC rate, minus any actual interest paid by the employee. This calculation is applied to the time-weighted average loan balance over the period the loan is outstanding, taking into account the number of complete tax months and any changes in the official interest rate.
Like Living Accommodation, this benefit is not eligible for payrolling in the April 2026/2027 tax year. The taxable benefit must instead be reported via P11D, with employer-only Class 1A National Insurance also due.
Employers can record the loan in the BIK module for tracking purposes, even though payroll interaction is not supported. The module will store the loan details, allow manual entry of the calculated cash equivalent, and link the benefit to the employee record for reporting. Future enhancements aim to simplify calculations and maximize automation where possible.
For full HMRC guidance, see: Expenses and benefits — loans provided to employees.
This article explains how these events should be applied with BIK module considerations and how to calculate the benefit value. There are a number of other articles to assist with preparing and processing benefits in the BIK module:
- For creating this benefit type at company level, go to Configuring Company Benefits
- For applying benefits to employee records, go to Applying Benefits to Employees: Manual & Data Imports
- For how this looks in Payroll when processing, go to How Payrolled Benefits are Reflected in Payroll
- For National Insurance and Best Practices, please read the National Insurance and Income Tax Handling for Payrolled Benefits article
Contents
- BIK Module Configurations and Considerations
- Event Type: Beneficial Loans
- Event Type: Loans you write off
BIK Module Configurations and Considerations
Interest‑Free and Low‑Interest Loans can still be assigned to an employee within the BIK module where organisations wish to maintain a complete record of loans provided. This allows employers to capture and track loan arrangements for visibility, audit, or internal reporting purposes.
However, because this benefit is not eligible for payrolling in the April 2026/2027 tax year, creating or maintaining a record will not generate any payroll interaction, taxable values, or National Insurance calculations within the system. The benefit remains informational only, with reporting and tax treatment continuing to be handled outside payroll via P11D, in line with HMRC guidance.
Employers should therefore treat this configuration as a way to document the benefit rather than to drive payroll processing, until legislative or product changes allow for payroll handling in future.
Future enhancements are planned to support automated calculation of cash equivalent values, reducing manual effort and improving compliance once payrolling becomes available.
Event Type: Beneficial Loans
This event type applies to loans that remain outstanding during the tax year and are not written off. The taxable benefit arises from the notional interest the employee would have paid at the official HMRC rate, minus any interest actually paid.
Income Tax Liability |
National Insurance Liability |
P11D (For 2026/2027 Tax Year) |
Class 1A (Employer Only), P11D(b) |
Working out the Taxable Amount
The cash equivalent must be manually calculated using the HMRC P11D methodology (currently linked to 2025/2026 P11D Working Sheet as 2026/2027 is not yet available), including adjustments for part-year loans, average balances, and any official rate changes. Once calculated, the value is entered into the employee’s BIK module record for recording purposes only, if the user wishes. The values are then submitted to HMRC via P11D and P11D(b) for the 2026/2027 Tax Year.
For example:
Assumptions for the tax year:
Loan amount: £15,000
Loan outstanding for 12 months
Official rate of interest: 3.75%
Employee pays £100 interest during the year
Calculation:
Average loan balance: £15,000 (full year, no partial-year adjustment)
Notional interest at official rate: £15,000 × 3.75% = £562.50
Less actual interest paid: £562.50 − £100 = £462.50
Taxable cash equivalent: £462.50
The employer enters £462.50 into the BIK module if they wish to keep a record of this value. For reporting and payment purposes, this is to be reported on the P11D for Income Tax and P11D(b) for Class 1A National Insurance.
Event Type: Loans you write off
This event type applies when an employer writes off all or part of a loan. The taxable benefit arises from the amount written off, which is treated as income for the employee.
Income Tax Liability |
National Insurance Liability |
P11D (For 2026/2027 Tax Year) |
Class 1 (Employer & Employee), due in full in the next pay period |
Because this event type attracts Class 1 National Insurance, please read the National Insurance and Income Tax Handling for Payrolled Benefits article.
Working out the Taxable Amount
The benefit value equals the amount of the loan written off. Any previous interest paid by the employee does not reduce the benefit once the loan is written off.
For example:
Assumptions for the tax year:
Original loan: £12,000
£4,000 of the loan is written off by the employer
Employee has paid £200 interest before write-off
Taxable cash equivalent: £4,000
The employer enters £4000 into the BIK module if they wish to keep record of this value. For reporting and payment purposes, this is to be reported on the P11D for Income Tax and £4000 added pay attracting Class 1 National Insurance, in full, in the next available pay period.
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