Interest rates are coming down, but HMRC's official rate of interest (ORI) for employee loans has increased to 3.75% per annum (6 April 2025) and, as of 29 August 2025, the average mortgage rate for a 30-year fixed mortgage is approximately 4.74%. The ORI is reviewed quarterly; therefore, any further changes will take effect on 6 October 2025 or 6 January 2026.
The disparity between rates could present directors (or anyone deemed to be a 'participator' or their associate with a financial interest in the company) with a possible short-term planning opportunity, such as using company funds to refinance personal mortgages or even settle credit card debts charged at higher interest rates.
The advantage of such a short-term loan is that it is interest-free, does not require completion of application forms and there is no risk of being refused by a bank. However, it is crucial to ensure that the loan or advance complies with tax regulations. The most important rule is that the loan must be repaid within nine months and one day after the end of the accounting period, otherwise the company will incur a charge of 33.75% of the outstanding balance. A refund claim can be made once the repayment has been repaid, but not earlier than nine months and one day following the end of the accounting period in which the debt was cleared and HMRC is notoriously slow in making corporation tax refunds. The refund claim must be made within four years of the end of the accounting period in which the loan was cleared, otherwise the relief is lost and the refund cannot be processed.
‘Bed and breakfasting’
Anti-avoidance rules also apply if, within any 30-day period, loan account repayments of £5,000 or more are made to the company, but then a further amount of £5,000 or more is withdrawn by that person or their associate in a subsequent accounting period. It does not matter which comes first, the loan repayment or the further borrowing, the 30- day period rule applies equally. This anti-avoidance rule is intended to prevent a director or participator from taking out a new loan to repay all or part of the original loan. Any repayment is matched against the new loan, not against the original, therefore only the 'net reduction' counts for the repayment.
In the 2024 Autumn Statement, the Chancellor announced a further anti-avoidance rule taking effect immediately, tightening the 'bed and breakfast' rules. Some companies were found to have been exploiting the rules by using one or more group or related companies to create a chain through which the debt could be passed from one to another, preventing the nine-month trigger date being reached.
Exemption from charge
Tax legislation provides a conditional exemption for certain smaller loans. Should the loan be £15,000 or less and made to a full-time employee who does not hold a material interest in the company, it will usually be exempt. However, be aware of the ‘intention and arrangements’ rule, applying where the balance of the loan outstanding immediately before the repayment is at least £15,000. If, at the time of repayment, there are intentions or arrangements to subsequently borrow at least £5,000, this rule will apply, even if the new borrowing falls outside the 30-day 'bed and breakfast' restriction.
Practical point
The anti-avoidance rules do not apply if the repayment incurs an income tax charge on the individual. Therefore, repayments in the form of (taxable) salary, bonus or dividends are generally considered exceptions to the rules. If the loan exceeds £10,000, consider charging interest.
