Is it worth the employer subsidising a mortgage?
Salary sacrifice arrangements, whereby an employee benefit was funded through a reduced salary to give rise to NIC and tax savings, were curtailed from 6th April 2017 following the changes introduced by the new Operational Remuneration Arrangements (OpRA) rules.
Many employers have been offering salary sacrifice arrangements as a way of incentivising their staff in a cost-effective and flexible manner. It is not unusual for employees to be offered a suite of benefits to choose from and select, in recognition that each employee has different needs. Those remuneration structures now have to be re-visited following the restrictions imposed by the OpRA rules.
One significant benefit that employers may wish to consider is to subsidise an employee’s mortgage payments or fund a deposit on a house. Such a decision however would be influenced by the employee’s importance to the company and the desire to retain their long-term service.
The employer could pay their employee’s mortgage payments in a number of ways but it should be noted that different rules apply for directors of close companies, and all PSCs will be ‘close’.
Employer meets mortgage payment
Where the mortgage provider is paid direct by the employer, then a benefit-in-kind arises upon which tax and Class 1A NIC is due. A cashflow advantage is enjoyed by the employee as they are only paying tax at their highest rate. The employer pays 13.8% Class 1A NIC which can claimed as a corporation tax deduction.
Example – Mark
Mark’s employer pays £800 monthly mortgage payments. Mark earns an annual salary of £35,000. The benefit arising on the mortgage payments is £9,600 (£800 p.m x 12) which is taxable at 20% = £1,920, as the basic rate threshold of £33,500 and personal allowance of £11,500 keep Mark within the basic rate of tax for 2017/18.
The cost of the mortgage to Mark is £160 per month, i.e £1,920/12.
If the employer paid Mark direct instead of the lender, then Mark would suffer NIC as well as the tax.
Beneficial loan to reduce mortgage or for house deposit
For loans under £10,000, no benefit-in-kind arises and therefore no tax to pay.
HMRC currently charge an official rate of interest of 2.5% on interest-free loans in excess of £10,000 to calculate the benefit-in-kind, and tax is paid on the interest only.
Example – Sarah
Sarah’s employer provides her with an interest-free loan of £80,000. Sarah pays tax at a marginal rate of 40%. The cost of the loan is £2,000 (£80,000 x 2.5%), on which Sarah will pay tax of £800 (£2,000 x 40%). Until such time that the loan is repaid or written off, then the cost of the loan to Sarah is £800 p.a.
No employment-related loan charge arises if the loan is a qualifying loan, i.e. where the interest on the loan qualifies for income tax relief.
Close company directors
The same benefit-in-kind rules apply to interest-free loans provided to directors. However, such loans must be repaid to the company within nine months of the end of the company’s accounting period otherwise it has to pay a s.455 CTA 2010 tax charge of 32.5% on the loan, which is in addition to its ordinary corporation tax bill. This additional charge can only be recouped by the company once the loan has been repaid.
Where such a loan is provided to a director, then a board resolution should be drawn up recording the event and stipulating the terms of the loan.
In spite of the 32.5% tax charge on non-repaid loans, directors who are higher or additional rate taxpayers may still find it beneficial to borrow from their company.