Employee Loans And Taxes

By Kylie Massey

The short answer is YES.

There are two types of loans a company can offer their employees: An interest-bearing loan (please be aware of the National Credit Act in this regard), and an interest-free loan. I will deal with the interest-free loan, as this has the main implications. The same principles apply to both, but with a small difference on the interest-bearing loans.

Whenever you are giving or paying an employee anything, you need to ask yourself the following two questions:

• Would the employee have gotten this if they were not in my employee?
  • Yes. Then it may not be income derived from employment.
  • No. Then it is most definitely income derived from employment.
• What is the benefit to the employee?

Your employees will often ask you, their employer, to forward them money for an unexpected expense, and the list is exhaustive. They ask employers, as almost always employers do not charge interest on the loans.

 Look at question 2, what is the benefit to the employee? They are not being charged interest and therefore the benefit is the interest portion of the loan that the lender would have charged. The difference is a taxable fringe benefit.

How do you work out the value of the interest, as the company has no idea what a money lender would charge?

 SARS have been kind enough to publish interest rates on which things like this should be calculated. Click HERE to see the updated table. It has recently been updated due to the 0.5% rate hike on 30^th March 2023. Effective 1 April 2023, the SARS “official interest rate” is 8.75%. We will work with this rate for all examples.

A worthy note is that casual, short-term loans up to R3,000.00 per annum are not subject to these calculations.

Should the interest rate vary over the term of the loan, the varying rate should be implemented at the time of the change.

The first type of loan we will be looking at is interest-free loans:

Example

A Company gives an Employee an interest-free loan of R5 000.00 April 2023, payable over 10 months at R500.00 per month. The employee is in the 18% tax bracket (this varies depending on employee and other benefits received through the year).

You can see from the table that there are two calculations that take place. 

• The first is the value of the interest at the SARS “official interest rate”. This value becomes a taxable fringe benefit. 
• The second calculation is to show the value of the tax that gets deducted from the employee as PAYE. 

Please make sure that your employees know that the full interest is not deducted, only the tax on the interest.

The second loan type is an interest-bearing loan. 

If a company offers their employee an interest-bearing loan at 12% interest per annum, then this calculation has no need to be implemented, as the interest rate is higher than the SARS “official interest rate”. 

If the SARS “official interest rate” adjusts for example to 15% in November 2023, then the employer would need to follow the steps as discussed below from that date on the remaining balance.

Should the interest-bearing loan be at 5% per annum. Ask yourself the question in no. 2 again. What benefit is the employee getting?

The employee is getting the benefit of the low interest, and therefore the interest benefit between the SARS “official interest rate” and the rate of 5% needs to be added to the employee’s salary as a fringe benefit and taxed. 

Example

The Company gives an Employee a R5,000.00 loan at 5% interest. The initial loan will be payable over 10 months at R500 per month, and the accrual of the 5% interest will be payable thereafter.

The table above refers: You would work out the company interest and add that onto the loan amount. You would work out the SARS “official interest” and you would deduct the company interest from the SARS “official interest”, this amount would be added to the employee’s taxable income, as a fringe benefit, and only this portion will be taxed.

This is one of those little hidden things.

All employee loans should be subject to these questions and subject to these calculations where applicable.

It should really be dealt with correctly. And now you know how!