A cheap company loan can still carry a tax cost. IRD increased the prescribed interest rate used for low-interest employment-related loans from 5.77% to 6.07% for the quarter beginning 1 October 2026. If your business lends to staff or has a shareholder-employee loan balance, this is a useful time to check the paperwork and calculation.
What changed in October?
The annual prescribed rate is 6.07% from 1 October 2026. The previous 5.77% rate applied from 1 January to 30 September 2026. IRD announced the increase on 8 September 2026, and Determination DET 26/06 provides for the quarter commencing 1 October and subsequent quarters.
These details were checked against IRD guidance on 10 November 2026. IRD reviews the prescribed rate quarterly, so do not assume 6.07% will remain the rate indefinitely or apply it backwards to every 2026 period.
The benchmark is not the FBT tax rate
The prescribed interest rate helps value the benefit of an employment-related loan where the borrower pays less interest than the applicable benchmark. It is not a 6.07% FBT charge on the loan balance, and it is not IRD’s use-of-money interest rate on overdue tax.
Under the prescribed-rate approach, the starting point is broadly the interest calculated at the prescribed rate for the relevant balance and period, less the interest charged to the borrower. You then determine the FBT consequences under the applicable rules. Different valuation options or exclusions may need consideration in particular cases.
A simple example of the rate difference
Assume an interest-free employee loan remains at $20,000 throughout the 92-day period from 1 October to 31 December 2026. Using a simple daily calculation and a 365-day year, prescribed interest at 6.07% is approximately $305.99.
At the previous 5.77% rate, the same illustrative calculation would be approximately $290.87. The difference is about $15.12 before rounding. That difference is an increase in the calculated interest benefit, not the FBT payable.
This example assumes the prescribed-rate method applies, no interest is charged, no repayments occur and no exclusion changes the treatment. An actual return needs the correct daily balances, interest and FBT calculation. It should not be prepared from this illustration alone.
Which balances should employers review?
Start with loans and advances made in connection with employment. A written loan agreement is useful, but a balance does not stop needing review merely because it is labelled a current account or staff advance.
Shareholder-employee balances need particular care. An overdrawn current account is not automatically subject to one universal tax answer. Employment status, the nature of the advance, interest charged and other rules can affect whether FBT or another treatment needs attention. Reconcile it before deciding.
Why a quarter-end balance may not be enough
A closing balance can hide what happened earlier. A loan may have been larger for most of the quarter, or repaid just before quarter-end. Dated advances and repayments help explain the actual benefit and support the calculation.
Keep the loan agreement, transaction history, opening balance, interest calculation and evidence of interest charged or paid. If terms change, record when the change takes effect rather than silently overwriting the old rate in your worksheet.
Should you start charging 6.07%?
Not without checking the agreement and the wider consequences. An IRD benchmark change does not rewrite a private contract. Charging interest may change the loan benefit and also creates accounting and potential income-tax considerations for the lender.
Before making a change, compare the current arrangement, the available cash, the contractual terms and the tax treatment. Do not backdate documents simply to make a calculation look tidier.
A short review checklist
- Identify employment-related loans and shareholder-employee balances needing review.
- Reconcile dated movements rather than relying only on the closing balance.
- Separate periods before and after 1 October 2026.
- Check the interest actually charged against the applicable valuation approach.
- Confirm the relevant FBT return, rate and filing obligations for your business.
Tāmaki Advisory can reconcile the loan account, review the interest worksheet and prepare the relevant FBT calculation or explain where another treatment needs consideration. Send the agreement and transaction history before the next return is prepared.
Make the next step practical
Use the ideas here as a starting point for a better conversation. The right answer depends on your records, timing and circumstances, so keep the assumptions visible and revisit them when something changes.