Andrew Brookes – Employer Solutions Specialist
Despite changes to the tax system, there are still many ways in which it is possible to reward staff, at least in part, in a tax efficient way.
Below is a list of the tax free benefits available:
Key tax free benefits
Updated September 2019
|iPad, laptop and/or other computer equip.||Employee must need it to perform job properly, private use insignificant.|
|Childcare vouchers||Closed to new entrants on 4 October 2018. Other employees should be directed to the new “Tax-Free Childcare” that the individual sets up without the employer’s involvement.|
|Mobile phone||One per employee, contract must be in employer’s name.|
|Parking space at or near work||Must be within a reasonable distance. Note: local authority can tax employer on worker car park spaces but most do not.|
|Parties||Annual event open to all employees at the location – cost including VAT must not exceed £150 per head per tax year. If £150 exceeded all costs for the event are taxable, not just the excess. Can choose which events to use exemption against where more than one annual event in tax year.|
|Eye tests and glasses etc||Test must be required under Health & Safety legislation and available to all employees, glasses required for employment, not general use.|
|Overnight incidental expenses||For overnight stays for business purposes can pay (in addition to accommodation and subsistence costs): £5 per night in UK or £10 per night overseas.|
|Medical screenings & check-ups||Up to one of each per tax year.|
|Bike and associated equipment||Tax free, providing all the qualifying conditions are met.|
|Homeworkers||Providing the conditions are met, the employer may contribute up to £4 per week towards household expenses for employees who have a home working arrangement. Alternatively, employers may agree a scale rate with HMRC or reimburse actual expenses.|
|Training costs||Must be job related.|
|Trivial gifts||Gifts must be no more than £50 including VAT per gift per recipient and given for a non-work reason e.g. birthday. Annual cap of £300 for directors and members of their households.|
|Pension contributions||Potential NIC saving, as well as tax, but limits on contributions. See notes for more details.|
|Death in service for employees||Exempt from tax and NIC if conditions met.|
Other tax efficient benefits
|Critical illness cover, medical insurance. Dental cover and income protection||Taxable benefit and Class 1A NIC arises, but this may be significantly cheaper than employee arranging cover personally. Note: Keyman insurance is a company policy and therefore premiums should be allowable for corporation tax relief.|
|Cheap loans||Taxable benefit may arise based on official interest rate. See notes for more details. See notes for more details|
Tax efficient benefits notes
Click to expand each section.
Assets in lieu of salary/dividends
As a general rule, where company assets are given to an employee, a benefit arises on either their cost to the employer for new assets or their market value for used assets. Therefore, while market values are low, it may be beneficial to transfer used company assets to employee/ shareholders in lieu of salary or dividends.
No benefit applies to provision of company van but it must be a goods vehicle, unsuitable for use as a private vehicle (note: any private use must be no more than insignificant & double cab vehicles may not qualify).
Must be available (and used by) more than one employee, used primarily for business and not kept overnight at the employee’s home. Complete mileage log demonstrating all mileage is for qualifying business travel is essential.
Where the company makes loans to employees, for loans over £10,000, a taxable benefit arises on the difference between the official interest rate and the actual interest paid.
If the recipient is a shareholder of the company (or their associate) the loan is treated as a notional dividend and S455 tax of 32.5% is payable unless the loan is repaid with 9 months of the year end. The S455 tax is repaid by HMRC once the loan is repaid.
However, if the loan is subsequently written off the S455 tax becomes repayable, while the loan write-off is taxable. NIC Class 1 is payable. Therefore, although the loans can lead to a tax charge, they can be an effective means of deferring an income tax liability, perhaps until a year when a lower income is anticipated. Watch the disguised remuneration anti-avoidance rules!
Low emissions cars
The benefit in kind percentages are scheduled to increase annually with the biggest increase applying to very low emission cars.
From April 2020, the rules are being revised and ultra-low emission cars are likely to have very low benefit in kind percentages from that date, based on range of the electric engine.
Car fuel benefits for company cars are increasingly expensive with a double increase applied annually to reduce the number of drivers for whom this is worthwhile. It is even more unlikely that a car fuel benefit is cost-effective for hybrid cars.
Electricity is not regarded as a fuel by HMRC and a car fuel benefit does not apply to pure electric company cars.
Employees using their own electric car for business can now be reimbursed at a rate of 4 pence per business mile by their employer without a tax charge, providing a suitable mileage claim is submitted.
Contributions to a pension scheme made by the company are eligible for relief in the corporation tax computations of the company for the year in which they are paid, unless they are deemed excessive. These employer contributions are not treated as taxable income of the employee.
By contrast, although contributions an employee makes to a personal pension scheme are eligible for tax relief, they will be made out of income that has suffered both employee’s and employer’s NIC.
There are both annual and lifetime limits for pension contributions and while tax relief may be secured at the time of payment, a tax charge may later arise in the event of exceeding either the annual or lifetime limits.
Optional Remuneration Arrangements including salary sacrifice (OpRA)
Where tax efficient benefits are provided, it may be possible to negotiate a reduction in pay with the employee in exchange for these.
Salary sacrifice schemes can still be effective for a small number of benefits including additional holiday, pension contributions, ultra-low emission cars, cycle to work schemes and child care vouchers.
However, most other benefits secured under an optional remuneration arrangement are subject to tax on the higher of the benefit in kind or the amount of the salary sacrifice. In some circumstances this can lead to excessive tax charges making the salary sacrifice extremely undesirable.
Where this benefit as an approved tax-free benefit it may be possible to agree a proportion of salary to ensure advantages are shared appropriately.
Advice is recommended in respect of these arrangements, especially if provided in accordance with a flexible benefits package.
Shares can be a useful way of rewarding employees so that they benefit from the success of the business as the company grows. This can give long term capital and income benefits even though there is a low immediate cost to employee and employer. They can be particularly useful in helping to retain key personnel for the longer term, as well as motivating employees to perform well. As a general rule, shares provided to an employee are subject to income tax on the difference between their market value and the price paid by the employee. The company is entitled to a corporation tax deduction on any taxable benefit arising. Where a market exists for the shares (typically a listed company) PAYE and NIC will apply to the share benefit.
Various schemes (such as EMI schemes) are available which can make providing the shares more tax efficient and avoid issues where, for example, an employee has an immediate tax liability arising on shares that cannot be sold for a restricted period, and therefore does not have funds available to settle the tax liability.
Disclaimer – The above is based on current legislation and the interpretation thereof. To ensure you are your decisions on up to date information and are making the best use of the tax exemptions and reliefs available, specialist advice should be obtained before implementing any of the aforementioned techniques.
Contact Menzies Employment Tax Solutions team
For more information on the above to to understand the tax efficient rewards open to employees, then please contact Andrew Brookes and the Employer Solutions team directly via the contact from below.