Is it really worth your while getting that low interest loan from your company?
Q: Liam, my employer has a facility to make loans available to staff at preferential rates. It’s an excellent benefit but I’m wondering is there a catch? I’m thinking of borrowing €8,000 to clear some other loans and a credit card. The rate I can avail of is at 7%.
A: If an employer offers loan facilities at a rate below a specified rate, a benefit in kind will be triggered, where you will have to pay income tax and PRSI on the difference between the interest paid at the preferential rate and the interest at the specified rate.
That specified rate at the moment is 13.5%. When calculating how much the BIK will amount to, subtract the preferential rate from the specified one and multiply the difference by the amount you are borrowing.
Example – 13.5% - 7% = 6.5% x €7,000 = €455.
So, the amount that is chargeable is €455 and this is treated as if it’s your income; if you are taxed at the higher rate, the €455 will end up costing you €200.20 once income tax and PRSI are deducted.
You’d be better off by c. €32 over a three-year period, at a preferential rate at 7% versus a standard rate of 9%, so the difference isn’t big when you factor in that BIK, but if could be much bigger depending on what rate you can avail of.