When an employer provides an employee with a non-cash benefit, such as a company car or private health cover, it is normally taxable on the employee effectively as income. Also, the employer usually has to pay Class 1A National Insurance contributions (NICs) on the benefit at 13.8%, just like normal salary.
However, there are some more favourable benefits which can avoid such punitive charges. The more widely applicable tax-efficient benefits are set out below, together with some special payments or reimbursements that can also be made tax efficiently.
Benefits are generally tax-deductible for the employer’s business, either as part of an employee’s ‘remuneration package’ or perhaps more generally to maintain goodwill amongst the workforce. Of course, this may be open to challenge where there is no clear ‘business case’ for the employer’s expenditure.
Pension contributions
This is a key benefit – particularly as provision is becoming mandatory. There is no taxable benefit when an employer makes a pension contribution on behalf of an employee, so no income tax for the employee or any NICs for the employer to pay.
It is quite common for pension contributions to be offered in lieu of a bonus or pay rise. Both employee and employer stand to benefit, because the employee avoids the income tax and NICs he or she would otherwise pay on salary, and the employer also avoids NICs.
In some cases, the employer will agree to ‘boost’ the payment by up to 13.8% so that the employee gets an even larger contribution, but the employer is in no worse position than if he’d paid gross salary plus employers’ NICs.
There are personal limits to the contributions each individual can make to his or her pension each year. Generally, a person may not contribute more than his or her ‘relevant earnings’ (basically for employees, salary plus taxable benefits) in a year, although anyone can pay up to £2,880 into a pension with no earnings at all. Employer contributions are not constrained by the employee’s relevant earnings, but they do count towards the ‘annual allowance’, which is currently limited to £40,000 contributions per year – plus any amounts unutilised from the last three years.
Childcare vouchers
These are also commonly (but not necessarily) agreed in a salary sacrifice arrangement, whereby the employee agrees to take vouchers in lieu of what would otherwise be taxable salary. An employee can receive up to £55 per week in vouchers and that part of his or her income would again be free of tax and NI. Note that vouchers basically have to be available to all employees, in order to be tax-free. The maximum amount falls to £28 per week for 40% taxpayers and £25 per week for 45% taxpayer employees. Spouses are separately eligible as employees for the vouchers, but the limits are per employee, not per child!
The vouchers can be applied to pay for childcare for children up to age approximately 15 years of age including tuition fees but the provider must be registered with OFSTED or national equivalent. Note that eligibility for childcare vouchers will be closed to ‘new’ claimants from autumn 2015 to coincide with the government’s new flagship childcare tax relief programme. However, many employees (such as in families where only one parent works) will be worse off or even ineligible under the new scheme, so do have a look at childcare vouchers soon, if they look like they may be beneficial.
Mobile telephones
Where the employer provides a mobile for business purposes, then there is no taxable benefit, regardless of how much actual private use there is. However, this is one of the most common benefits to get wrong, as far as family companies are concerned: DO NOT have the contract in the name of the employee as this is called ‘settling the employee’s pecuniary liability’ and costs income tax and NICs as if it were salary. This rule applies generally across all benefits but all too frequently rears its head with mobile contracts.
Annual staff events
The employer can spend up to £150 per head over the year (including spouses/partners) on annual events such as the Christmas party, Easter Day at the races, Summer BBQ, or any combination, etc., provided the aggregate cost falls below the £150 per head threshold, with no taxable benefit in kind.
Staff meals/canteen
There are some fairly detailed rules about the provision of ‘proper’ meals in a staff canteen which are commendable, but before we take out a slide rule and protractor, consider that in HMRC’s Employment Income manual at EIM21670, the guidance confirms that ‘The exemption applies to light refreshments as it does to meals’. While EIM21863 talks only about tea and coffee, I have known some employers to provide an Aladdin’s cave of crisps, soft drinks and nibbles – the key being that any employee can partake. Of course, this is great news for ‘young’ offices where the occupants can subsist on a diet of Pringles and Jammy Dodgers. The refreshments should be on a reasonable scale, so don’t go too mad.
Home office
The legislation (ITEPA 2003, s 316) exempts the provision of office/computer equipment, furniture, stationery, etc., away from the employer’s premises, so long as provided solely to enable the employee to perform the duties of his or her employment and any private use is ‘not significant’. See EIM21611; see also EIM21613 for examples of how flexible HMRC is about ‘significant’ private use when it wants to be.
Homeworking expenses
There are some quite rigid rules for claims in relation to additional expenditure incurred where an employer requires an employee to work from home – typically where the office is too far away or there is no space available (EIM32760).
However, an employer can reimburse an employee under voluntary homeworking arrangements up to £4 per week or £18 per month without needing to keep evidence of the employee’s additional costs, where employees regularly work at home under the arrangements. These amounts are free of tax and NICs. See EIM01472 and following.
Scale rate expenses etc.
Many readers will be familiar with the mantra that ‘round sum expense payments without receipts are always taxable as salary’. Interestingly, however, large tracts of HMRC’s guidance are given over to:
- Benchmark scale rate expenses (EIM05200 and following) - Where HMRC allows standardised unit rates to cover the incidental cost of meals, etc, taken away from home on allowable business journeys. Businesses may agree their own rates, or follow HMRC’s benchmark rates, such as £15 for a late evening meal, or £5 for breakfast. Note that the employee has actually to incur some cost in relation to meals, etc., even if he or she doesn’t have to provide receipts to cover the amount reimbursed;
- Working rule agreements (EIM71300 and following) - Various industries (typically construction) have agreed national rates to cover the reimbursement of nights away from home on business, which HMRC abides by, such as £35 per night for lodging and meals, agreed by the Construction Industry Joint Council – or the slightly more adventurous £37.32 per night agreed with the Electrical Contractors’ Association; and
- Incidental overnight expenses (EIM02710 and following)- Effectively a ‘petty cash’ amount to cover private incidental expenses which would not normally be considered deductible but a round sum allowance of £5 per night away from home on qualifying business travel (£10 outside the UK) will bear neither tax nor NICs.
Practical Tip:
While benefits and reimbursements are normally taxable, there are quite a few ‘perks’ which have tax-favoured status. As we approach a new tax year, make sure to incorporate those which are relevant to your business, but note that it pays to review HMRC guidance carefully, and to take advice where appropriate, to ensure you are not caught out by ‘the small print’ – such as childcare vouchers or refreshments having to be available to all staff in order to be tax-free.
