Title Taxation of loans to employees (Fringe Benefits Tax)
Description

Sometimes employers provide loans to their employees and charge an interest lower than the prescribed rate. This becomes a benefit to the employee, for which the employer needs to file and pay Fringe Benefit Tax.


The difference between the prescribed rate and the employer's loan rate is chargeable to tax, on the employee. The taxable value of fringe benefit tax is the difference between the market interest rate and the actual interest paid on the loan. 


Example:


Ken gets a loan of Kshs. 3,000,000


Loan amount:  Kshs.3, 000,000


Interest charged: 3%


Market Interest rate for the month: 9%


Fringe Benefit is (9% - 3% = 6%) = Kshs.3, 000,000 x 6% =180,000 p.a   


i.e.   Kshs. 15,000   per   month.


Fringe   Benefit   tax   payable   by   employer   is   Kshs.   15,000   x   30%


  =  Kshs. 4,500/-  for the month
Category More about PAYE