A guide to tax-free benefits and expenses payments for employers.
In this article, we consider some of the main benefit rules that apply to directors and employees.
Today the remuneration of many directors and employees comprises a package of salary and benefits. Essentially two tests must be applied in determining the tax implications of any benefit.
- Is the benefit taxable?
- If the benefit is taxable, what is its taxable value?
In this factsheet, we give guidance on some of the main benefit in kind rules and outline some common types of benefits.
It is not intended to be an exhaustive guide and any decisions should be supported by professional advice appropriate to your personal circumstances
Setting the scene
All earnings of an office or employment are taxable. Where they are not in cash it becomes necessary to put a value on them.
As a general rule unless the benefit can be converted into cash there is no taxable benefit. Where it is convertible into cash the taxable amount is the resale value.
To prevent avoidance, additional legislation charges certain other benefits to tax. The detailed rules are complex. We can advise on structuring remuneration packages, including benefits, in a tax efficient way.
Employers are required to notify HMRC of benefits provided to directors and most employees by completing forms P11D annually.
Penalties can apply where the forms are submitted late or are incorrect.
The full amount of any benefit must be reported on this form.
In general, employees' national insurance (NIC) is not due on benefits except vouchers, stocks and shares, the discharge of an employee's personal liability and benefits provided by way of 'readily convertible' assets.
Most benefits are subject to Class 1A NIC payable by the employer. As this amounts to 13.8% of the taxable value of the benefit, you always need to consider the tax efficiency of providing benefits.
Please consult AVASK for advice.
Certain benefits are not taxable. The most important ones are:
- retirement benefits which are paid by an employer into a registered pension scheme
- meals provided in a staff canteen;
- drinks and light refreshments at work;
- parking provided at or near an employee's place of work
- workplace nursery places provided for the children of employees;
- in-house sports facilities;
- payments for additional household costs incurred by an employee who works at home removal and relocation expenses up to a maximum of £8,000 per move;
- the provision of a mobile phone or vouchers to make available a mobile phone (limited to one phone per employee only);
- annual social functions for employees provided the total cost of all events in a tax year is less than £150 per head;
- trivial benefits up to £50 or £300 per annum in close company situations.
A statutory exemption applies for trivial benefits in kind. The exemption sets out a number of conditions that must be met for a benefit to be exempt which are that the:
- cost of providing the benefit does not exceed £50 benefit is not cash or a cash voucher;
- benefit is not provided under salary sacrifice arrangements or any other contractual obligation;
- benefit is not provided in recognition of particular services performed by the employee in the course of the employment or in anticipation of such services.
In addition where qualifying trivial benefits are provided to directors and other office holders of close companies they will be subject to an annual cap of £300. In a case where the benefit is provided to a member of the employee's family or household who is not an employee of the employer, this benefit will count towards the £300 exempt amount. Where the director's or other office holder's family or household member is also an employee of the company, they will be subject to a £300 cap in their own right.
Please contact AVASK for advice on how the exemption operates.
The following benefits are taxable on all employees:
- any living accommodation provided, unless job related;
- credit tokens.
In addition, special rules apply to tax other benefits received by directors and all but the lowest paid employees. Common types of benefits provided are detailed below.
The government has introduced new rules which limit the income tax and employer NICs advantages where:
- benefits in kind are offered through salary sacrifice; or
- where the employee can choose between cash allowances and benefits in kind.
The taxable value of benefits in kind where cash has been forgone will be fixed at the higher of the taxable value or the value of the cash forgone.
These rules will not affect employer-provided pension saving, employer-provided pensions advice, childcare vouchers, workplace nurseries, Cycle to Work schemes or Ultra-Low Emission Vehicles.
This change took effect from 6 April 2017. Those already in salary sacrifice contracts at that date become subject to the new rules in respect of those contracts at the earlier of:
- an end, change, modification or renewal of the contract;
- 6 April 2018, except for cars, accommodation and school fees when the last date is 6 April 2021.
Employers may wish to review their car policy in light of these rules.