The official rate of interest set by HM Treasury was increased to 3.75% from 6 April 2025. Before this date it was 2.25%, and so there is an increase of 1.5%.
The official rate of interest is no longer set for a full year and is now reviewed each quarter by HM Revenue & Customs (HMRC). Any changes will take effect on 6 April, 6 July, 6 October and 6 January of each tax year.
The official rate of interest is used to calculate the benefit in kind arising on beneficial or ‘cheap’ loans made to employees and also living accommodation provided to an employee that costs more than £75,000.
The increase in the official rate of interest will result in an increase in benefit in kind, for example:-
Benefit in kind and tax implications
If an employee/director had an outstanding interest free loan for the whole of the 2025/2026 tax year of £100,000, the benefit in kind from 6 April 2025 would be £3,750 as opposed to previously £2,250. If the tax payer is subject to higher rate tax this would result in a tax liability of £1,500 as opposed to £900 previously, an increase in tax payable of £600.
Class 1A NIC implications
The company providing the benefit in kind will also be subject to Class 1A National Insurance contributions at a rate of 15% on the benefit in kind. Taking into account the above example, this would result in a Class 1A NIC liability of £562.50.
In view of this, any outstanding beneficial or ‘cheap’ loans may need to be reviewed to see if these can be reduced in any way to avoid the increased tax burden.
Contact
We are able to help you with this. Please get in touch with the Leicester office on 0116 254 9262, or Loughborough office on 01509 263500 to discuss your situation. Alternatively, our contact form is here.