Income Tax (Earnings and Pensions) Act 2003 section 195

Discharge of notional loan: amount treated as earnings

Section 195 explains when a notional loan (created when an employer provides a beneficial loan to an employee on favourable terms) is treated as discharged, and the tax consequences that follow from that discharge.

• A notional loan is treated as discharged when the actual loan is repaid, when the employee's obligation to repay ceases, or when the interest benefit is replaced by a cash payment or other benefit
• Where the notional loan is discharged because the employee's obligation ceases or because the benefit is replaced, the amount discharged is treated as taxable earnings of the employee
• This charge applies even if the employment has ended or has become an excluded employment by the time the discharge occurs
• For the purposes of applying this charge, the employment is deemed to still exist and not to be an excluded employment, ensuring the tax charge cannot be avoided by timing