Benefits-in-kind (BIKs) and expenses payments are generally treated as ‘earnings’ and are charged to income tax (and in most cases, NICs). However, employees in ‘lower paid’ employment have historically been exempt from the charge on certain benefits, such as living accommodation, vouchers and credit-tokens. Broadly, the term ‘lower paid’ refers to employees earning at a rate of less than £8,500 for a tax year (including those benefits/expenses).
From 6 April 2016, the £8,500 threshold is to be abolished and this will result in an income tax charge on those BIKs and expenses payments for people whose total income, from all sources, exceeds the income tax personal allowance (£10,600 for 2015-16). The NIC rules will be aligned with the tax rules, meaning that employers may have additional NICs to pay.
This change will remove the need for employers to complete forms P9D for ‘lower paid’ employees. Employers who do not opt for voluntary payrolling (see below) will report them all to HMRC by just one method (form P11D). Employers will no longer need to continually monitor employees’ earnings and BIKs to see whether they fall above or below the threshold.
Voluntary payrolling
In conjunction with the changes outlined above, from 2016-17 employers will have the option to payroll voluntarily car, car fuel, medical insurance and subscriptions such as gym memberships. Employers opting to payroll BIKs will report the value of the benefits through the PAYE real time information (RTI) system, and subsequently will not be required to report them on annual forms P11D.
Dispensations
Under the strict letter of the law, nearly all expenses payments and BIKs are taxable, although the employee can claim a deduction for certain expenses that they have incurred in order to perform the duties of their employment. Where HMRC are satisfied that no additional tax would be due, they may grant a ‘dispensation’, which relieves the employer of the obligation to report such items. A dispensation can cover both income tax and NICs.
From 6 April 2016, expenses payments and BIKs provided to employees will be exempt from income tax and NICs where they would have been eligible for a deduction, had they incurred and paid the equivalent expense themselves. The exemption will also allow employees to be paid a ‘scale rate’ in respect of a qualifying expense, rather than being reimbursed the expense they have actually incurred. This can either be a rate set by HMRC in secondary legislation, or a rate that they have agreed with HMRC. This change means that employers will no longer have to apply for a dispensation, and there will be no reporting requirements for such expenses.
However, unlike dispensations, the exemption will not be capable of applying to expenses payments or BIKs that are provided as part of a salary sacrifice arrangement.
Practical Tip:
Providing low-cost benefits (such a flowers or wine for an employee’s birthday) has often caused confusion for employers, as there has been no clear approach to the tax treatment of such items. A statutory exemption to exclude ‘trivial benefits’ was due to take effect from 6 April 2015, but this did not happen; on 24 March 2015, HMRC advised that Parliament had decided not to legislate for the new exemption in Finance Bill 2015 and instead will legislate in a future Finance Bill. This means that the income tax exemption did not take effect from 6 April 2015 as previously advised. The current system remains in place, but future changes can be expected in due course.
