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draiells
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Anna has an annual salary of £30,000, and two loans from her employer:
? A season ticket loan of £8,300 at no interest; and
? A loan, 90% of which was used to buy a partnership interest, of £54,000 at 0.5% interest.
What is Anna’s tax liability for 2019/20?For the second loan,
Why are we calculating qualifying interest at ORI 2.5%? why not 0.5%? what is the rule about it? I’ve prolly missed it.. please help me understand.
Tax Tutor
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From what you have told me this is not a question about qualifying interest payments, it is a question about computing the taxable benefit under the employment income rules for beneficial loans – see OT notes Chapter 9 Employment Income, page 59 note (i) on beneficial loans and then let me know if you now understand
draiells
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Sir, what I already know is, The taxable benefit would be, £54,000 *(2.5 – 0.5) = 1,080
but what I particularly don’t understand in the answer is that why do we deduct qualifying interest deemed paid (£54,000 * 2.5% × 90%) (1,215)
The 2.5% ORI we’re taking for qualifying interest. Do we always do like that if our interest rate is less than ORI?
Tax Tutor
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Apologies – I misunderstood your question to be why do we use the ORI in computing the benefit.
There are different ways of dealing with a beneficial loan made by the employer for what then represents a qualifying loan for which interest if paid by an individual would be an allowable qualifying interest payment.
It would be useful if you would tell me what the answer has included within the employment income assessment for all beneficial loans and what in total has been deducted as qualifying loan interest payments so that I can try to explain the method used.
In respect of your direct question about why in respect of the 54,000 we deduct 1215 – this is a combination of the 0.5% actually paid and the 2% (2.5% – 0,5%) taxable benefit that the individual has been assessed on.draiells
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Salary 30,000
Season ticket loan (non-qualifying): not over £10,000 0
Loan to buy partnership interest (qualifying): £54,000 * (2.5 – 0.5 = 2%)
1,080
Earnings/Total income 31,080
Less qualifying interest deemed paid (£54,000 * 2.5% × 90%) (1,215)
Net income 29,865
Less personal allowance (12,500)
Taxable income 17,365
Income tax
Tax liability £17,365 * 20% 3,473.
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.Ok sir, so what I understand from your reply is that, When we compute taxable benefit of a qualifying loan that was taken below ORI, the qualifying interest payment would be deemed deducted at ORI too….
draiells
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This is the complex explanation which I can’t really understand properly:
If the whole of the interest payable on a qualifying loan is eligible for tax relief as qualifying interest, then no taxable benefit arises. If the interest is only partly eligible for tax relief, then the employee is treated as receiving earnings because the actual rate of interest is below the official rate. They are also treated as paying interest equal to those earnings. This deemed interest paid may qualify as a business expense or as qualifying interest in addition to any interest actually paid.
Tax Tutor
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Yes, what you are saying is correct.
If an interest free beneficial loan is also a qualifying loan for purposes of qualifying interest payments then this would be treated as exempt income and excluded from both employment income and and qualifying interest payments as we would simply be adding and deducting the same figure.
If some interest is paid by the individual the assessable benefit is lower (1,080 that you show above) but the qualifying loan interest payment deduction would be the combination of the assessable benefit plus the interest paid (1,215 as you show above) ie a total of 2.5%.
draiells
Tax Tutor
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