Loan facilities come in handy with the need for that extra cash. Some employers offer loans to their employees at interest rates lower than market rate. This is an employment benefit to the employee(s) which is subject to a tax known as Fringe Benefit Tax (FBT).

Fringe benefit tax is payable by every employer in respect of a loan provided to an employee, director or their relatives at an interest rate lower than the market rate.

The taxable value of fringe benefit tax is the difference between the market interest rate and the actual interest paid on the loan. Where the term of the loan extends beyond the date of termination of employment, it applies as long as the loan remains unpaid. Withholding tax rate of 15% on the deemed interest shall be deducted and paid to the Commissioner within five working days following the computation. The prescribed rate of interest is based on the market lending rates as the Commissioner may prescribe every quarter of the year.

Example;

Juma gets a loan of Kshs. 2,000,000

Loan amount:  Kshs.2, 000,000

Interest charged: 4%

Market Interest rate for the month: 15%

Fringe Benefit is (15% – 4% = 11%) = Kshs.2, 000,000 x 11% =220,000 p.a   

i.e.   Kshs. 18,334   per   month.

Fringe   Benefit   tax   payable   by   employer   is   Kshs.   18,334 x   30%

  =  Kshs. 5,500/-  for the month