The tax implications of writing off loans

An employee who is being made redundant has asked his employer to write off their outstanding training costs loan as part of their redundancy termination package. But what are the tax implications here?  Tax Expert Brona MacDougall explains.

Where a loan to an employee is written off by the employer for any reason, HMRC treats the written off amount as earnings for tax purposes, i.e., income tax and NI will be due on it. There are no special rules for redundancy situations. As an alternative, assuming the redundancy termination payment proposed is less than the £30,000 exemption, the employer could increase it by the outstanding balance of the training costs loan. Then, before the payment is made to the employee, they can deduct the outstanding loan amount in repayment of the training costs loan. This is unlikely to trigger the writing off rules.

As an employer, you are not obliged to write off any outstanding loans where an employee is being made redundant and you can refuse. But to avoid any misunderstanding, you should set out your rules on loans to staff in a clear policy.

SUMMARY
When a loan to an employee is written off by the employer for any reason, HMRC treats the amount written off as earnings for income tax and NI purposes. You are under no obligation to write off loans to employees, including in compulsory redundancy situations.