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Topic: Employee benefits and expenses

alternative interest calculation method letter
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Alternative interest calculation method letter

Alternative interest calculation method letter

Where an employer provides a cheap rate or interest-free loan there’s more than one way to work out the taxable benefit - the normal averaging method or the alternative precise method. You can elect to substitute the figure calculated using the normal average method for the alternative precise one.

Two methods

1. Average loan balance. Where the interest payable by you on a loan from your company is less than the amount that you would pay at the official rate set by HMRC, the difference is a taxable benefit in kind. Usually, interest at the official rate is worked out on the average loan balance. The average balance is arrived at by adding together the amount of the loan outstanding at the beginning of the tax year and the balance at the end of the tax year.

2. Alternative precise method. However, if the loan balance varies widely during the year, you could save tax by electing for the “alternative method of calculation”. The effect of this is that the official interest is calculated by applying the official rate to the balance of the loan outstanding on each day during the tax year instead of the average. Where your company loan balance has changed because of irregular repayments or advances during the tax year, it’s worth checking whether the alternative method can save you tax.

The election must be received by HMRC within twelve months from the 31 January that follows the end of the tax year for which you wish the alternative method to apply, e.g. for 2019/20 the deadline is 31 January 2022.

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