Income Tax (Earnings and Pensions) Act 2003 section 175A

Optional remuneration arrangements: "relevant amount" and "modified cash equivalent"

Section 175A defines how to calculate the "relevant amount" and the "modified cash equivalent" when an employee receives a cheap or interest-free loan as part of an optional remuneration arrangement — that is, where the employee has given up salary or another benefit in exchange for the loan.

• The "relevant amount" is the difference between the amount of salary or benefits foregone for the loan and any interest the employee actually paid on the loan during the tax year.
• The "modified cash equivalent" is the notional interest at the official rate on the loan, calculated without deducting any interest the employee actually paid — effectively the gross interest charge before any credit for payments made.
• The modified cash equivalent is treated as zero if the loan benefit would have been exempt from income tax were it not for the rules that switch off certain exemptions for optional remuneration arrangements.
• Where earnings need to be apportioned between the loan benefit and other benefits for the tax year, the apportionment must be made on a just and reasonable basis.