Tony Granger examines the benefit of an employer subsidised mortgage.
The world of employee benefits is changing. For example, it has recently been shaken by the curbs on using ‘salary sacrifice’ (from 6 April 2017) to fund employee benefits such as company cars. Under salary sacrifice, the employee funded the employee benefit through a reduced salary with some National Insurance contributions (NICs) and tax savings.
Employers considering the provision of benefits to employees should closely examine the potential value of employee benefits. Perhaps the biggest impact an employer could have on the life of an employee is to subsidise mortgage payments or fund a deposit for a house.
There are a number of different ways for a company or employer to pay an employee’s mortgage payments, and these are considered below. Note that different rules may apply for directors of ‘close’ companies.
1. Employer pays mortgage payment
If the employer pays the mortgage lender direct, then this is treated as a benefit-in–kind, and tax and Class 1A NICs are payable. This could be seen as a cash-flow advantage for the employee, as the cost of the benefit would be the rate of tax, say 20%. The employer pays 13.8% Class 1A NICs, which is normally an allowable deduction from the company’s profits.
Example 1: Mortgage payments by employer
An employer pays £1,000 per month mortgage payments. The employee earns £30,000 salary per annum, and is age 40. The personal allowance of £11,500 and tax threshold at £33,500 in 2017/18 keeps him within the 20% tax rate. Tax on the benefit is 20% x £12,000 = £2,400.
Personally, the cost of the mortgage is £200 per month for the employee. If the employer paid the employee direct instead of the mortgage provider then tax is payable plus NICs by the employee.
2. Employer makes beneficial loans to employee who reduces his mortgage or makes a deposit on a house:
Whether interest is payable or not, there is no benefit-in-kind tax charge to pay, under the beneficial loan rules.
Where the loan is interest-free, then loan interest is calculated at the HMRC official rate of 2.5% and benefit-in-kind tax is paid on the interest element only.
Example 2: Employer loan
The employer loans or arranges a loan of £100,000 for an employee who pays tax at a marginal rate of 40%.
If no interest is charged to the employee on the loan, then the cost of the loan is 2.5% x £100,000: £2,500 x 40% = £1,000 to the employee. This will be the cost each year until the loan is repaid or written off (and if the tax rate remains the same – a 20% taxpayer will only pay £500).
The loan can be used for any purpose - for example, if used to buy a property that is let and interest is deductible, then the loan interest is usually not taxable.
3. Directors of close companies
Loans to directors can be made and the benefit-in-kind rules apply as above. However, such loans need to be repaid within nine months of the company’s accounting period end, otherwise it will pay corporation tax of 32.5% (CTA 2010, s 455) of the loans. This extra 32.5% is repayable to the company by HMRC after the loan is repaid to the company. A board resolution should be recorded that a loan is to be made to the director, and stating the terms of the loan.
Notwithstanding the company tax charge, it may still be beneficial to the director who is paying tax at 40% or 45%, to take loans from the company.
If setting up an employer-subsidised mortgage scheme, have the mortgage payments made fortnightly instead of monthly. This could save up to four years on a 30-year mortgage.
This article was first printed in Tax Insider in July 2017.