The official rate of interest used for beneficial loans is to be fixed one year in advance. The rate for 2000/01 is 6.25%. This will make calculations and loan decisions simpler. It will also make beneficial loans more attractive if interest rates continue to rise.
The change is seen as a deregulatory measure. At present, the official rate seeks to match the going rate for mortgage interest. This means that it usually changes when the bank base rate changes. Where the rate changes during the tax year, the employer must calculate the benefit of the loan either by averaging the rates during the period, or by calculating each tax month separately. If the rate does not change, this calculation is not required.
Inland Revenue says that it will not increase the official rate during the tax year even if there are further increases in bank base rate. It will however reduce the rate if there are reductions in the base rate.
The official rate is used to calculate the taxable benefit an employee receives from having an interest-free or low-rate loan from his employer. The taxable benefit is the difference between any interest paid and the amount payable if the employee had been paying at least the official rate. This rule is subject to many exceptions. In particular it does not apply to loans of up to £5,000, so most loans to buy an annual season ticket do not trigger a tax charge. The official rate is also used to calculate the taxable benefit of providing an employee with living accommodation.
[2000]