Employees earning 8,500 pounds a year or more (including gross expenses payments and the value of benefits in kind) and directors are taxed on benefits in kind received by virtue of their employment.

If the benefit in kind is in the form of a loan repayable at an advantageous rate of interest, tax is chargeable on the difference between the interest paid by the employee (if any) and the interest which would have been paid on the loan at the “official rate” of interest.

Fixing the official rate in advance for the whole of the following tax year will simplify record-keeping, valuation and reporting requirements.

Therefore as a deregulatory measure, the “official rate” is set to remain at 6.25% for both the current (1999-00) tax year and the 2000-01 tax year. This will make it simpler for employers to work out the value of beneficial loans which they need to report on behalf of their employees for income tax purposes and on which they will be liable to pay Class 1A National Insurance Contributions (NICs) from April 2000.

In future, the official rate will continue to be set in advance for the whole of the following tax year and will not be increased during that tax year, even if typical mortgage rates, on which the official rate is based, do increase. However, the Inland Revenue recognise that this policy would need to be reviewed if typical mortgage rates were to fall sharply during a future tax year: the advantages, in terms of lower regulatory burdens, of leaving the official rate unchanged for the whole tax year could in those circumstances be outweighed by the need to reduce the official rate so as not to overtax the benefit.


1. Where interest on a beneficial wholly qualifies for relief, the employee is entitled to an offsetting deduction against the taxable benefit. On 19 November, the Paymaster General, Dawn Primarolo, announced in response to a Parliamentary Question, that these fully qualifying beneficial loans are to be exempted from both tax and Class 1A NICs from April 2000 [see Inland Revenue Press Release on 19 November: Reform of Class 1A National Insurance to include Exemption of Tax and NICs Charges on Some Employee Benefits] so that employers will no longer have to report them.

2. Employers will, however, still have to report other beneficial loans for both tax and (from April 2000) Class 1A NICs purposes.

3. Regulations which came into force on 6 March 1999 (S1 1999 No. 419) set the “official rate” of interest at 6.25 per cent from that date, at the lower end of the range of bank and building society mortgage rates.


1. Section 160 Income and Corporation Taxes Act (ICTA) 1988 charges the benefit of a loan provided by an employer to an employee by reason of the employment where either no interest is paid on the loan or the rate of interest chargeable is less than interest at the “official rate”. It provides that the amount of the benefit shall be equal to the cash equivalent.

2. Schedule 7 ICTA 1988 defines the cash equivalent for the purposes of Section 160 as the amount of interest which would have been payable for the year on the loan at the “official rate” of interest less any interest actually paid on the loan for the year.

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