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<b>Tax News:</b> Official interest rate frozen again. By Nichola Ross Martin

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6th Feb 2006
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HMRC has announced that the official rate of interest for 2006-07 will once again be 5%. This rate has been effective since 6 April 2002.

The official rate of interest is the rate at which benefits in kind are calculated when employees receive cheap or interest free loans from their employer. The rate is used to calculate a notional benefit in kind, from which the interest actually paid in the year is deducted to arrive at the actual benefit.

The rate is normally set before the start of each tax year, and for simplicity, it is not changed during the year, although HMRC do have the right to change it if market conditions change significantly. This would normally only be the case if interest rates fell ' any rises can be picked up on an annual basis.

Some employers use a "strict" daily basis to calculate the benefit in kind, rather than averaging the loan over the tax year and taxing it on the average amount outstanding. The rate for the strict basis is also 5%, but this rate can be changed on a month by month basis if necessary. The strict rate has been 5% since 6 January 2002. Employees, and HMRC have the option to request that a loan is taxed on a strict basis, calculating interest on the daily balance outstanding. This can be beneficial if the loan balance fluctuates significantly.

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