Preferential loans

A preferential loan is a loan made by you to your employee or former employee, or their spouse. It arises where the rate of interest applied to the loan in a year is lower than the specified rate. The specified rate is set by the Department of Finance.

A preferential loan is a taxable benefit-in-kind. Your employee is chargeable under the Pay As You Earn (PAYE) system on the benefit to:

If you are in the business of granting loans to the public, this is not a benefit in kind if:

  • the rate you charge to the public is lower than the rate set by the Department of Finance
  • your employee is charged at the same rate as you charge to the public.

Calculation of benefit

The benefit is treated as notional pay of the employee for the relevant tax year. You must deduct PAYE, PRSI and USC from this notional pay.

The value of the benefit is the difference between:

  • the interest actually paid by the borrower in a year
  • and
  • the specified rate for that year.

It reflects the interest that would have been charged, had there been no connection between the two parties.

The interest charged can be calculated on the:

  • reducing balance
  • average balance for the year (the opening balance plus the closing balance, divided by two)
  • period the loan was available in that year.

If you write off the loan, the amount written off becomes a taxable amount in the year it is written off.

Specified rates

Current rates specified by Department of Finance
Qualifying home loans 4%
All other loans 13.5%

What is a qualifying home loan?

A loan used by your employee to purchase, repair, develop, improve a residence used by:

  • your employee
  • a former (or separated) spouse or civil partner of your employee
  • a dependent relative of your employee who does not pay rent to your employee.

If the loan is a qualifying home loan, you must receive a signed statement from your employee confirming this.


A loan your employee uses to pay off a property loan can also be a qualifying home loan.

Arm's length rate

You can use a rate lower than the specified rate where your business involves providing home loans. You can use the rate that you would normally charge your customers for a home loan (the 'arm's length' rate). The loan must be provided to your employee:

  • for the purchase of a residence
  • for a stated term of years
  • at a fixed rate of interest (set at an arm's length rate).