Lending money to employees and directors can help them buy a season ticket, buy shares in the company or pay a tax bill. These loans can be a valuable tool for employers, offering flexibility and incentives that foster goodwill, improve employee experience and engagement, and help employees manage significant expenses. However, it is important to structure these arrangements carefully to ensure compliance with the law and to avoid unintended tax or regulatory consequences.

Can employers offer loans to employees and directors?

In general, there is no outright legal ban on providing loans to employees or directors. However, you must take care not to breach the general prohibition on carrying on regulated activities without authorisation (section 19 of the Financial Services and Markets Act 2000), or the requirements of the Consumer Credit Act 1974 (CCA). For example, entering into a regulated credit agreement as lender is a regulated activity for which authorisation is required.

Breach of the general prohibition is a criminal offence, punishable by up to 2 years’ imprisonment and an unlimited fine, plus any loan entered into in breach of it may be unenforceable.  
It is therefore crucial to structure employee and director loans in a way that either falls outside the scope of regulation or fits within a recognised exemption.

How can employers provide loans without needing FCA authorisation?

There are several exemptions that may allow you to provide loans without FCA authorisation and meet CCA rules:

Low-Cost Credit Agreements

Key conditions for this exemption include:

• the agreement is between you as the employer (lender) and the employee (borrower);
• you provide the loan in the course of the employee’s employment; and
• the only charge for credit is interest, which does not exceed 1% above the Bank of England base rate, or any charges/interest cannot increase after the agreement and do not exceed 1% above base rate.

This exemption is often suitable for straightforward loans where interest is minimal or not charged  - although this may have tax consequences (see below). 
If the loan will be used to acquire shares or other securities supplied by a company other than your company, then additional considerations apply.

Fixed-Cost Credit

This exemption can apply to loans that:

• are repaid in no more than 12 instalments within 12 months of the agreement; and that
• are interest-free with zero charges.

This is a flexible exemption, suitable for a variety of loan arrangements, including loans to shareholders to acquire shares, provided the repayment terms are met.

High Net-Worth Borrowers

If you are making the loan to a director or senior employee earning at least £150,000 per year (net) or who has net assets of at least £500,000, and the loan exceeds £60,260 (or is secured on land), a different exemption may be available. However, this comes with additional administrative requirements such as obtaining a statement of assets and liabilities.

Tax treatment of employee loans

When you provide a loan to an employee or director, there are important tax considerations, particularly if the loan is interest-free or at a low interest rate.

Benefit in kind

If the total outstanding employment-related loans to an employee or director exceed £10,000 at any point in the tax year, and the interest charged is below the official rate set by HMRC, the difference is treated as a benefit in kind. The value of the benefit is calculated as the difference between the interest actually paid and the interest that would have been paid at the official rate. The employee would then need to pay income tax on the value of the benefit, and you would be subject to class 1A national insurance contributions for the employer.

If the loan is below £10,000, it is generally not treated as a taxable benefit.

What happens if an employee loan is written off?

The amount written off is taxable as general earnings in the hands of the employee, and so will be subject to income tax and employee national insurance contributions. You will also be liable to employer national insurance.

For income tax reporting purposes the amount of the loan that is written off must be included on the employee’s form P11D, with the tax due by 31 January following the end of the tax year.
For national insurance purposes the written off amount should be processed through payroll in the month of the write off.

Employee loan repayments

If the employee or director is going to repay the loan gradually out of their salary, then you’ll need to make sure that you have the necessary authorisations in place.  Deductions from an employee’s wages are unlawful without the employee’s express written permission in advance or a clause in the employment contract allowing the deduction.

You’ll also want to think about what happens when the employee leaves your employment. Typically, you’ll want to reserve the right to recover the full outstanding amount and deduct this from the employee’s final salary or any other payments you make to them on termination of employment.

Loans to shareholders in small companies

If a company makes a loan to a shareholder in a close company (broadly, a UK company controlled by five or fewer shareholders), there are additional tax implications:

• if the loan is not repaid within nine months of the end of the company’s accounting period, the company must pay a tax charge (known as section 455 tax) at 33.75% of the outstanding loan amount.
• if the loan is repaid, the tax is refunded, but anti-avoidance rules apply to prevent "bed and breakfasting" (repaying and quickly re-borrowing the same amount).
• if the loan is written off instead of being repaid, the section 455 tax is recoverable, and the write-off is treated as a dividend for the shareholder.

If the loan is provided by a party that is not the employer, this could trigger an anti-avoidance tax charge under the UK’s ‘disguised remuneration’ tax rules unless it is either being provided by a party which counts as a group entity for these purposes or another exemption to these tax rules is available.

What happens if a shareholder loan is written off?

When you write off a loan made to a shareholder, this is treated as a distribution for tax purposes, and you’ll want to consider the following:

• The amount written off is treated as a dividend in the hands of the shareholder.
• The shareholder will be liable to pay dividend tax on the amount written off, at the applicable dividend tax rates.
• This ensures that shareholders cannot avoid income tax on dividends by receiving funds as loans that are subsequently written off.
• The company must have sufficient distributable reserves to lawfully make a distribution, including the writing off of a loan.
• Proper approval is required, typically by the board of directors, and the decision should be documented in board minutes.
• The write-off should be reflected in the company’s accounts as a distribution.

Shareholder loans: practical considerations at investment or exit

• It is common for shareholder loans to remain outstanding until a significant event, such as an investment round or a shareholder exit.
• The funds flow may involve the repayment of the loans, allowing the company to recoup any section 455 tax previously paid.
• Careful planning is required to ensure that loans are either repaid or, if written off, that all tax and legal requirements are met.

Key takeaways

Employee and director loans can be a valuable benefit, supporting both the employer’s business objectives and the employee’s personal needs. However, it is essential to consider the regulatory framework, structure the loan to fit within an exemption if FCA authorisation is not held, ensure that you have the correct authorisations to deduct repayments from salary and be mindful of the tax implications, particularly where loans are interest-free or made to shareholders.

Careful planning and clear documentation are vital to ensure that loans are both legally compliant and tax efficient.