The official rate of interest is a rate set by HMRC which is used to calculate the benefit in kind tax charge on cheap employment-related loans, and also the amount charged to tax in respect of the provision of employer-provided living accommodation where the cost of that accommodation is more than £75,000.
Employment-related loans
The amount charged to tax in respect of the benefit of a taxable cheap employment-related loan is found by comparing the amount of interest paid by the employee (if any) with that which would have been payable had the employee paid interest at the official rate. Where the interest actually paid is less than that chargeable at the official rate, the employee is taxed on the difference. If the loan is interest free, the taxable amount is the interest that would be payable on the loan at the official rate. The charge may be calculated in one of two ways, either by using the average balance outstanding during the tax year (or such shorter period for which the loan was outstanding) or by using the precise method which is based on the actual balance outstanding on each day of the tax year.
Living accommodation
The official rate of interest is also relevant in calculating the additional yearly rent that applies where the cost (or market value, where appropriate) of living accommodation provided by an employer is more than £75,000. This is added to the difference between the annual value or, if greater, the rent paid by the employer and any rent paid by the employee to arrive at the measure of the taxable benefit. It is found by multiplying the official rate of interest by the amount by which the cost (or market value, as appropriate) of the accommodation exceeds £75,000.
Move to quarterly updating
In January 2000, the then Inland Revenue made a public commitment that the official rate of interest would not increase in-year. For 2024/25 and earlier tax years, the official rate of interest applying for the year was announced in advance. For 2024/25, the rate is 2.25%.
However, from 6 April 2025, the public commitment made in 2000 will no longer stand and for 2025/26 and later tax years, the official rate of interest may be changed in-year where appropriate. The official rate of interest will be reviewed quarterly and any changes in the rate will be made following a quarterly review. Thus, from 6 April 2025, the official rate of interest may be increased, decreased or maintained following a quarterly review. This will allow the official rate of interest to track movements in actual interest rates more closely.
From 6 April 2025, the official rate of interest is increased to 3.75%. The official rate of interest is published on the Gov.uk website at www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates/beneficial-loan-arrangements-hmrc-official-rates.
The move to in-year changes will remove some of the certainty as to the tax that an employee will pay on the benefit of a cheap employment -related loan or on employer-provided living accommodation and potentially make the calculation of the taxable amount more complex.
