From Perk to Payslip: How Soft Loans Impact Employee Tax
From Perk to Payslip: How Soft Loans Impact Employee Tax
Offering employees soft loans—loans with below-market interest rates—can be a powerful retention tool. But what many employers overlook is how these incentives are treated for tax purposes.
While employers aren’t obligated to offer loans, when they do, the financial benefit to the employee doesn’t go unnoticed by the tax authorities. The difference between the interest charged on the loan and the statutory Bank of Ghana rediscount rate is considered a taxable benefit. This amount is added to the employee’s total emoluments and taxed monthly through payroll.
Not all employee loans are tax-free! A loan from your employer could be taxable if:
- The loan is from employer to employee.
- The loan term exceeds twelve months; and
- The aggregate amount of the loan and any similar loan outstanding at any time during the previous twelve months exceeds three months’ basic salary.
How to determine taxable interest
To Compute the Interest, the formula is Interest= (Principal + rate +Time) /100
I = (P x R x T)/100
To compute the Loan benefit, the formula is {C = [A-B]/4}
Where
A = Interest payable at the statutory rate
B = Interest paid by the employee
C = Loan benefits
CASE STUDY
The table below shows June 2024 incomes of two employees of BDO Ghana Limited, and you are required to determine the loan benefits applicable to these employees.
(Assume that the statutory rate is 22% p.a.)
Solution
Kofi
He will not be liable to tax on the loan benefit because:
- Loan repayment period does not exceed 12 months,
- Had no similar loan outstanding at any time during the previous twelve months, and
- His current loan amount of GHS1,000.00 does not exceed his three months’ basic salary of GHS 14,130.00 (GHS 4,710.00 x 3= GHS 14,130.00).
Ama
She will be liable to tax on the loan benefit because:
- Loan repayment period exceeds 12 months
- Total loan amount of GHS 16,000.00 exceeds her three month’s basic salary of GHS 10,000.00 (GHS 3,333.00 x 3 = 10,000.00)
- Interest payable at statutory rate = GHS 16,000.00 x 22% x 2 = 7,040.00
Actual loan interest paid= GHS 16,000.00 x 8% x 2 = 2,560.00
Total loan interest benefit = GHS 4,480.00
However, the taxable loan benefit is (4,480 x 1/4) = GHS 1,120.00
Therefore, loan benefits applicable to each employee are as follows;
Soft loans can be a valuable support system for employees, but their tax implications can affect the overall benefit. Understanding these rules helps employees avoid surprises and make the most of the support offered.