How to respond to an employee loan request
Many employees are struggling with the cost of living crisis and an unexpected bill may put them at breaking point financially and mentally. If an employee in this situation approaches you for a loan, are you legally obliged to help them?
In a recent survey, 52% of employees stated that the cost of living crisis is impacting them hard. Many are looking for a new role with a higher salary or requesting a pay rise.
As an alternative, a member of staff might approach their employer for a short-term loan, particularly if they’ve been hit with an unexpected bill which they can’t afford to pay, e.g. their boiler has broken down or they need emergency repairs to their car.
If one of your employees approaches you for a loan, what should you think about before you agree? The first thing to remember here is that you’re under no legal obligation to lend money to an employee - so you can refuse a request.
However, if you have funds available and want to help the employee, you can agree a loan which should be on a discretionary basis.
Before doing so, you should find out:
- the purpose of the loan
- how much the employee wants to borrow
- when they need the money by
- how much they can afford to repay you each month; and
- if they have any other outstanding loans with you.
You can glean this information by asking your employee to complete our loan application form (see The next step ).
To protect you and the employee, it’s best not to lend them more than 10% of their gross annual salary. Also, you should only allow one loan to run at a time.
If the employee can’t pay you back, or it’s going to take them a long time based on their outgoings, it’s probably safer for you to refuse the loan.
Any loan you make to an employee should be made on an interest-free basis. Loans up to £10,000 are exempt from income tax and National Insurance if the combined outstanding value to the employee of all loans is less than £10,000 throughout the whole tax year.
Where you agree a loan to an employee, don’t rely on a verbal arrangement. Always formalise what you’ve agreed, including the terms of repayment, in a robust loan repayment agreement (see The next step ). Apart from the fact both parties will then have the terms of the agreement in writing, this enables you to lawfully make deductions from the employee’s pay to repay the loan.
Tip. Ensure that the employee signs the loan repayment agreement before you advance the cash to them. Where possible, seek to have the loan repaid in twelve months or less (assuming this doesn’t put the employee to unnecessary financial hardship).
You’ve no legal obligation to help an employee who is facing financial hardship. However, you can agree a loan on a discretionary basis. To protect you, it should be made on a tax-free basis and not exceed 10% of the employee’s annual gross salary. Always formalise your loan repayment agreement in writing.