The Taxes (Interest Rate) (Amendment) Regulations 2025
The Taxes (Interest Rate) (Amendment) Regulations 2025, effective April 6, 2025, raise the official interest rate used to calculate tax on employment-related loans from 2.25% to 3.75% per annum.
This amendment modifies the Taxes (Interest Rate) Regulations 1989, impacting the tax liability for individuals receiving employment-related loans with interest rates below the new official rate.
The change aims to update the tax calculation to reflect current economic conditions and ensure fairer taxation on these types of loans.
Arguments For
Increased Revenue: A higher official interest rate could generate increased tax revenue from employment-related loans, as the tax calculation is based on the difference between the official rate and the interest actually paid.
Fairer Taxation: Adjusting the official interest rate to reflect current economic conditions ensures fairer taxation of employment-related loans, preventing avoidance through excessively low interest rates.
Alignment with Economic Conditions: Increasing the rate aligns the tax calculation with prevailing interest rates, making for a more appropriate calculation of tax owed on the benefit of an employment-related loan.
Simple Implementation: The amendment directly modifies an existing regulation, minimizing operational complexity and administrative burdens.
Arguments Against
Increased Tax Burden on Employees: Employees benefitting from subsidized low-interest employment-related loans may incur higher tax burdens as official interest rates increase, potentially impacting their financial wellbeing.
Potential for Unintended Consequences: Changes to tax legislation can unexpectedly affect employee-employer relationships, potentially changing employee benefit packages.
Lack of Transparency: While the impact note claims no substantive policy change, there are potential unintended consequences that could impact a wider system than specified.
Inflationary Pressures: Increasing interest rates can contribute to inflationary pressures in the broader economy, impacting consumer spending and investment decisions.
- Citation and commencement These Regulations may be cited as the Taxes (Interest Rate) (Amendment) Regulations 2025 and come into force on 6th April 2025.
This section provides the official title of the regulations, 'Taxes (Interest Rate) (Amendment) Regulations 2025', and states their effective date as April 6, 2025.
- Amendment of the Taxes (Interest Rate) Regulations 1989 In regulation 5(1) of the Taxes (Interest Rate) Regulations 1989, for “on and after 6th April 2023, be 2.25 per cent per annum” substitute “on and after 6th April 2025, be 3.75 per cent per annum.”
This section details the specific change made to the existing Taxes (Interest Rate) Regulations 1989.
It replaces the previously stated interest rate of 2.25% per annum (effective April 6, 2023) with a new rate of 3.75% per annum, effective April 6, 2025.
This amendment affects the calculation of the 'official rate of interest' used in income tax calculations regarding employment-related loans.
EXPLANATORY NOTE (This note is not part of the Regulations) These Regulations amend the Taxes (Interest Rate) Regulations 1989 ("the 1989 Regulations"). The 1989 Regulations set the official rate of interest for the purposes of Chapter 7 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"). Chapter 7 provides that tax is chargeable on an employment-related loan to the extent that the interest rate that it carries is lower than the official rate of interest. Calculation of the cash equivalent of the benefit of the loan for any tax year, which is generally the amount of the benefit that will be treated as earnings from the employment, is the difference between the amount of interest on the loan at the official rate and the amount of interest paid on the loan for that year. Section 181 of ITEPA, in effect, defines “the official rate of interest” as the rate prescribed in regulation 5 of the 1989 Regulations. Regulation 2 increases the generally applicable official rate of interest from 2.25 per cent to 3.75 per cent per annum with effect from 6th April 2025. It does not affect the modified official rates that apply in relation to Japan and Switzerland, which are prescribed in regulation 5(2) of the 1989 Regulations. A Tax Information and Impact Note has not been prepared for this instrument as it contains no substantive changes to tax policy.
The explanatory note clarifies the purpose and impact of the regulations.
It explains that the amendment affects the official interest rate used in calculating tax on employment-related loans under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
The note details how this official rate is determined and the effect of increasing it from 2.25% to 3.75%.
It also specifies that this change does not affect the official rates applicable to Japan and Switzerland.
Finally, it asserts that a tax impact note was deemed unnecessary as the change involved no substantive changes to tax policy.
This latter point is contentious.