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ACCA Strategic Professional · Advanced Taxation (UK) · Income tax: income from employment

Tessa, a higher rate taxpayer, has an employer loan of £40,000 for the whole of 2025/26 at 1.75% interest, paid in full. The official rate is 3.75%. Using the average method, what is the net additional income tax cost to Tessa, after allowing for the interest paid?

The additional tax cost is £320. The gross benefit is £1,500, being £40,000 at 3.75%. Interest of £700 paid by Tessa is deducted, leaving a taxable benefit of £800, which is taxed at 40% as she is a higher rate taxpayer.

  1. A£320Correct
  2. B£800
  3. C£1,500
  4. D£0

Explanation

Gross benefit = £40,000 x 3.75% = £1,500. Interest paid = £40,000 x 1.75% = £700. Net benefit = £800. Tax at 40% = £320. £800 is the net benefit before tax. £1,500 ignores the interest paid.

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