More firms are turning to equity-based partnership schemes to retain senior staff — offering admission to partnership or equity ownership funded by a non-recourse loan from the employer, rather than requiring the individual to find the cash themselves. It’s an attractive structure: no upfront capital outlay for the employee, and a powerful retention tool for the business.
But it comes with a tax wrinkle that’s often misunderstood — and, more importantly for our clients, a mortgage affordability myth that needs clearing up. This piece is for both sides of that conversation: employers weighing up whether to offer the scheme, and employees trying to work out what it actually means for their finances and their ability to borrow.
How the loan is taxed
Because the loan is interest-free (or charged below the market rate) and provided by reason of employment, HMRC treats it as an employment-related loan for benefit-in-kind (BIK) purposes.
- If the combined balance of all such loans to the employee is under £10,000 at any point in the tax year, there’s no BIK charge at all.
- Above that threshold, HMRC calculates a notional benefit using the official rate of interest (ORI) — currently 3.75% for 2026/27. This isn’t a payment the employee actually makes; it’s simply the value HMRC treats as if it were extra salary, taxed accordingly. Since 6 April 2025, HMRC can also revise the ORI quarterly rather than fixing it for the whole tax year, so this figure isn’t guaranteed to stay flat over the life of the loan.
- The benefit is reported on a P11D (or payrolled) and taxed as income in the employee’s hands. The employer also picks up a Class 1A National Insurance charge (currently 15%) on the benefit value.
Crucially, none of this touches the £150,000 (or whatever the loan amount is) itself. The employee isn’t taxed on the loan capital — only on the notional annual “interest” HMRC imputes because the loan is cheap or free.
Worked example: £300,000 earner, £150,000 loan
To make this concrete, here’s the position for someone earning a £300,000 salary who’s admitted to partnership via a £150,000 interest-free, non-recourse loan.
| Without the scheme | With the scheme (£150,000 loan) | |
|---|---|---|
| Salary | £300,000 | £300,000 |
| Benefit-in-kind (£150,000 × 3.75% ORI) | — | £5,625 |
| Total taxable income | £300,000 | £305,625 |
| Income tax due (2026/27 rates) | £121,203 | £123,734.25 |
| Net cash pay (annual) | £178,797 | £176,265.75 |
| Net cash pay (monthly) | £14,899.75 | £14,688.81 |
At this income level the employee is already deep into the 45% additional-rate band, with their personal allowance fully tapered away — so the entire £5,625 benefit is taxed at 45%, with no NI implication (BIK doesn’t attract employee National Insurance) and no knock-on effect on the personal allowance (already at nil).
The net effect: roughly £211 a month less in take-home pay, purely from the tax on the benefit — nothing is actually leaving their bank account to service the loan itself.
On the employer side, the cost of offering the loan is the Class 1A NIC charge: 15% of £5,625 = £843.75 a year, payable annually alongside the P11D(b) return. That’s a modest, predictable cost against the value of securing a partner’s long-term commitment without them having to raise £150,000 in cash.
The mortgage affordability myth
This is where we see the most confusion, on both sides of the scheme.
The misconception: if your maximum mortgage borrowing was £1,000,000, and you have a £150,000 employer loan outstanding, you must now only be able to borrow £850,000 — as though the loan is simply subtracted from your borrowing power.
Why that’s wrong: mortgage affordability isn’t calculated by netting your assets and liabilities off against a headline number. It’s calculated from your income and, for most lenders, your existing monthly credit commitments — things like loan repayments, car finance, or credit card minimum payments that come out of your account every month and reduce what’s left over to pay a mortgage.
A non-recourse scheme loan with no monthly repayment simply doesn’t have a line item to deduct. There’s no repayment leaving the employee’s account, so it doesn’t reduce disposable income the way a personal loan or car finance agreement would. The £150,000 balance is real, but it isn’t a monthly cost — and monthly cost is what affordability calculators are built around.
What does change, as shown above, is a modest reduction in net take-home pay — around £211 a month in this example — because of the tax on the notional benefit. In isolation, that’s the only mechanism by which the scheme touches affordability.
Why that £211 barely moves the needle at this income level
This is really the core point of this piece: once you’re earning at this level, net pay stops being the binding constraint on how much you can borrow.
Most mainstream affordability calculators are designed around household budgets — rent/mortgage, bills, childcare, debt repayments, general living costs — and stress-test whether there’s enough left over each month to cover the mortgage payment plus a margin. For the majority of applicants, that net-income headroom is exactly what caps their borrowing.
But for high earners, lenders very often move to a straightforward income multiple basis instead — typically 4.5x to 5.5x gross income, and higher for professionals with enhanced-multiple products — because gross income so comfortably exceeds any realistic monthly outgoings that a granular affordability stress test isn’t the limiting factor. A £211/month dent in take-home pay is immaterial against that kind of income multiple headroom; it wouldn’t move the maximum loan amount at all in most cases.
What lenders will want to know
None of this means the loan is invisible to a lender. Most will still ask about any outstanding liabilities on the application form, and it’s worth being upfront about the scheme rather than letting it surface later in underwriting. In practice, lenders typically want to understand:
- That the loan is genuinely non-recourse and there’s no contractual monthly repayment obligation
- Whether it’s secured against anything else the client owns (it generally isn’t, but this needs confirming)
- Whether it could be called in on terms that would affect the client’s finances (e.g. on leaving the partnership)
This is a disclosure and underwriting question, not a borrowing-power deduction — and different lenders take different views on how much detail they want, so it’s worth flagging early to a broker so we can place the case with a lender comfortable with the structure, rather than assuming it will automatically be treated as a pound-for-pound reduction in what’s available.
The takeaway
For employers, an equity loan scheme is a genuinely low-cost way to bring people into partnership without demanding cash up front — the main ongoing cost is a modest annual Class 1A NIC bill. For employees, the tax hit is real but small relative to income at this level, and — contrary to a common assumption — the loan balance itself is not simply deducted from maximum mortgage borrowing. The two things that actually matter for affordability are income and monthly commitments, and a well-structured non-recourse loan barely touches either.
If you’re an employer considering this structure, or an employee who’s been offered one and wants to know exactly where you’d stand on a mortgage application, get in touch — we can model your specific numbers and talk through how individual lenders on our panel treat these arrangements.
This article is for general information only and does not constitute tax or mortgage advice. Figures are based on 2026/27 tax rates, thresholds and National Insurance rates, and on HMRC’s official rate of interest as published for 2026/27 (3.75%), which HMRC may revise during the year following its quarterly review. Individual circumstances vary — employees and employers should take specific tax advice, and mortgage applicants should speak to a broker about how individual lenders treat non-recourse employer loans.