PAYE & BIK Flashcards
What is a preferential loan?
A preferential loan occurs when a loan is made by an employer to an employee or their spouse at an interest rate lower than the specified rate set by the Department of Finance.
How is a preferential loan treated for tax purposes?
It is considered a taxable BIK. The employee must pay Income Tax, PRSI, and USC on the benefit under the PAYE system.
When is a loan not considered a preferential loan?
If the employer is in the business of granting loans and the rate charged to the employee is the same as that charged to the public, and this rate is lower than or equal to the rate set by the Department of Finance.
How is the benefit of a preferential loan calculated?
The benefit is the difference between the interest actually paid by the borrower and what would have been paid at the specified rate. This amount is treated as notional pay for tax purposes, and PAYE, PRSI, and USC must be deducted by the employer.
What methods can be used to calculate the interest on a preferential loan?
Interest can be calculated on the reducing balance, the average balance for the year, or based on the period the loan was available during that year.
What happens if a preferential loan is written off?
The amount written off is treated as a taxable amount in the year it is written off, adding to the employee’s taxable income.
What are the current specified interest rates for preferential loans?
As per the Department of Finance, the rate for qualifying home loans is 4%, and for all other loans, it is 13.5%.
What constitutes a qualifying home loan and how is it treated?
A qualifying home loan is used by the employee for purchasing, repairing, developing, or improving a residence. For tax purposes, such loans may have different specified rates, and the employer must obtain a signed statement from the employee confirming the use of the loan for qualifying purposes.
What is the arm’s length rate and when can it be used?
Employers who provide home loans as part of their business can charge an arm’s length rate, which is the rate normally charged to customers for home loans. This rate must be used under specific conditions such as for the purchase of a residence for a stated term of years at a fixed rate.
