Income Tax (Earnings and Pensions) Act 2003 section 182

Normal method of calculation: averaging

Section 182 sets out the normal method for calculating the notional interest on an employment-related loan at the official rate, using an averaging approach across the tax year.

• The average loan balance is calculated by taking the maximum amount outstanding at the start and end of the relevant period, adding them together, and dividing by two.
• If the official rate of interest changed during the period the loan was outstanding, a weighted average official rate is calculated based on the number of days each rate was in force.
• The notional interest is then computed using the formula: average loan balance × official rate (or average rate) × whole months outstanding ÷ 12, where a month begins on the 6th of each calendar month.
• This averaging method applies for all purposes of the employment-related loans chapter, including determining whether a loan falls within the scope of the beneficial loan rules in the first place.