Benefit of Preferential Loans
Preferential Loans
PAYE and PRSI apply to the benefit derived by an employee from certain loans at preferential rates of interest.
A "preferential loan" means a loan, made by an employer to an employee or former employee, the spouse of an employee or former employee in respect of which no interest is payable, or interest is payable at a rate lower than the "specified rate". It does not however include such a loan where the rate of interest is not less than the rate of interest at which the employer in the course of the employer’s trade makes equivalent loans for similar purposes at arm’s length to persons other than employees or their spouses.
Specified Rates
The current specified rates are:
Qualifying Home Loans 5% All Other Loans 12.5%
These rates should be used until further notice.
The specified rate depends on whether the loan is a qualifying home loan or a loan for other purposes. A qualifying home loan is a loan which qualifies for mortgage interest relief. The specified rates are varied from time to time depending on changes in commercial rates.
Taxable benefit to which PAYE / PRSI applies
PAYE and PRSI are to be applied to the difference between the amount of interest paid or payable on the preferential loan in the tax year and the amount of interest which would have been payable in the tax year if the loan had been subject to the specified rate.
The basis used for the purposes of calculating the interest which would have been payable on the loan at the specified rate applicable should be the basis in use for the purposes of calculating the actual interest payable on the loan, e.g. based on the amount outstanding at the start of the year or on the reducing balance during the year.
Example 1
An employer makes a qualifying home loan to an employee. The loan amount is €10,000 and the interest rate is 2%. The loan term is one year and the interest is charged on the full amount.
The interest which would be payable on such a loan at the specified rate is €500 (€10,000 @ 5%).
The interest which will be actually paid on the loan at the agreed lending rate will be €200 (€10,000 @ 2%).
The taxable benefit is €300 (€500 - €200).
Notional pay of €300 (€5.76 per week/ €25 per month) must therefore be added to the employee’s money wages or salary for the year for the purpose of calculating PAYE and PRSI.
Example 2
An employer makes a car loan to an employee. The loan amount is €20,000 and the interest rate is 6%. The loan term is one year.
The interest which would be payable on such a loan at the specified rate in the year is €2,500 (€20,000 @ 12.5%).
The interest which will be actually paid on the loan for the year at the agreed lending rate is €1,200 (€20,000 @ 6%).
The taxable benefit is €1,300 (€2,500 - €1,200).
Notional pay of €1,300 (€25 per week / €108 per month) must therefore be added to the employee’s money wages or salary for the year for the purpose of calculating PAYE and PRSI.
Example 3
On 1 January - 2008, an employer makes a qualifying home loan (for the purchase of a principle private residence) to an employee. The loan amount is €50,000 and the interest rate is 3%. The loan term is twenty years. At the end of the first year, the outstanding loan balance is €48,500.
Year 1
The interest which would be payable on such a loan at the specified rate is €50,000 @ 5%
= €2,500.
The interest which will be actually paid on the loan at the agreed lending rate is €50,000 @ 3% = €1,500.
The taxable benefit in year 1 is €1,000 (€2,500 - €1,500) and notional pay of this amount (€19.23 per week / €83.33 per month) must be added to the employee’s money wages or salary for the purposes of calculating PAYE and PRSI.
Year 2
The interest which would be payable on the loan at the specified rate is €48,500 @ 5%
= €2,425
The interest which will be actually paid on the loan at the agreed lending rate is €48,500 @ 3% = €1,455.00.
The taxable benefit in year 2 is therefore €970 (€2,425 - €1,455.00) and notional pay equal to that amount (€18.65 per week / €80.83 per month) must be added to the employee’s money wages or salary in that year for the purposes of calculating PAYE and PRSI.
Example 4
A company makes a car loan to a director. The loan amount is €15,000 and the interest rate is 0%. The loan term is five years and the loan is to be repaid at the rate of €3,000 per annum. The interest which would be payable on the loan for each year and the loan balances outstanding at each year end would be as follows:
Interest Balance
Year 1 €1,875 (€15,000 x 12.5%) €12,000
Year 2 €1,500 (€12,000 x 12.5%) €9,000
Year 3 €1,125 ( €9,000 x 12.5%) €6,000
Year 4 €750 ( €6,000 x 12.5%) €3,000
Year 5 €375 ( €3,000 x 12.5%) Nil
As no interest is actually payable on the loan, the taxable benefit for each year is the amount of interest calculated at the specified rate as shown above and notional pay equal to that amount should be added to the employee’s money wages or salary for each year for the purposes of calculating PAYE and PRSI.