The Benefit Of ’Benefits’!

A few months ago, we talked about ‘tax-favoured’ benefits in kind, which might prove a useful, more tax-efficient alternative to normal cash salary, or a bonus. This article takes a broader look at the benefits-in-kind regime, to help people to know what to look out for, whether ordinary benefits-in-kind still offer some advantage, and also point out some particularly nasty traps to avoid.

Basically, any non-cash ‘perks’ that an employee receives or enjoys by reason of employment are potentially a taxable benefit. 

Most people are aware that if you have a ‘company car’ (a car provided by the employer, company or not, which is available for an employee’s personal use) then you will ordinarily suffer a tax charge.  

But did you know that the benefit-in-kind legislation is drawn so widely that your office computer, desk, car parking space and even the pens in your drawer are covered by the benefits code? The regime is more widely drawn than most people realise, because it is held in check by various exemptions which help ordinary employees to avoid a tax charge for doing something as innocuous as using the office computer for surfing the internet in their lunch break. 

Most of the time, the value of the benefit for tax purposes is the cost to the employer, with car and fuel benefits being notable exceptions as they are calculated also by reference to the car’s carbon dioxide emissions. Benefits may sometimes be calculated according to their market value – particularly when assets are given or loaned to employees.

The employee is liable to an income tax charge on the value of the benefit, as calculated on a Form P11D, and which is normally collected through his or her tax return, or by a change in PAYE tax code when HMRC processes the P11D. The employer is also liable to NICs.

But note that the employee is not liable to NICs on most benefits, so real savings can be made, as the following example demonstrates:

Even benefits which are not ’tax favoured’ can save tax (or NICs)

Let’s take a common benefit in kind, which has no tax-favoured status, such as private healthcare paid in a firm-wide policy by the employer. 

If we assume that Martin starts a job with a cash salary of £30,000 per year and, following a probationary period, is offered free family health cover as part of his employer’s scheme worth £150 a month, (or £1,800 per year) or alternatively, a cash pay rise of £1,800 a year.

If Martin opts to take the cash, his extra monthly net pay will be:

 

If instead Martin agrees to take the private medical as a benefit in kind, then he is actually better off:  

Martin will have to find an extra £30 each month out of his original salary to pay the extra tax on the benefit-in-kind, but this is less than he would have to find if he took a cash pay rise in the first example – he is better off by £18 a month, or nearly £220 a year, because he pays no extra NIC on the benefit. Note that the net saving reduces when Martin’s salary increases past the level at which his NIC charge falls to just 2%

Having established that even ordinary taxable benefits in kind may still be worthwhile, here are some hazards to beware – 

Most benefits do not ‘bite’ for lower-earning employees – those who earn less than £8,500 a year (when this limit was originally introduced, £8,500 was a substantial salary – but that was decades ago!). One could be forgiven for thinking that taking a low salary might be enough to circumvent this limit and enjoy benefits without the tax charge, but not so; the threshold of £8,500 is compared to the aggregate of salary and any potential benefits, to see if the limit is breached and those benefits become taxable.

In small family companies, it is very common for the husband, wife and even children all to work in the business – tax inspectors will often check if this is the case when they undertake a PAYE inspection. 

The typical scenario they are looking for is where one person is a director and the other family members take modest salaries but enjoy substantial taxable benefits, such as company cars. They will argue that those benefits have been provided only because they are relatives, and it is really the director’s taxable benefit. If the director is taxable at higher rates, then re-assigning the benefit will result in a much higher tax charge. 

In some sectors, it is not uncommon for one business to offer sales incentives to the employees of another business – such as where one sells the other’s products. These sales incentives often constitute taxable benefits for those employees, but the fun really starts when trying to decide which company is required to submit the P11Ds and pay the employers’ NICs – it is not always the business providing the benefit, particularly if the employing business has helped to arrange the incentive scheme.

Probably the most common pitfall is for a business to settle an employee’s personal liability, such as club membership, or a mobile ‘phone bill. This can prove expensive: it is a quirk of the NICs rules that settling an employee’s personal bill is immediately chargeable to employers’ and employees’ NICs through the payroll – and the employee still has to pay tax through the P11D route as usual.

The solution is normally quite straightforward: if the employer contracts directly instead of the employee, then employees’ NIC can be avoided and the normal rules for benefits apply.

Where a business provides fuel alongside a car that is available for an employee’s personal use, there is an additional taxable benefit. Thanks to political tinkering, ostensibly to encourage people to use lower-emission vehicles, (or not to use a car at all), the fuel benefit can be as much as £7,385 this year, if the CO2 emissions are high enough, costing almost £3,000 for a 40% taxpayer.  

Hopefully this article will have helped to demonstrate that taxable benefits may, in some cases, be useful. However, there are numerous traps for the unwary – and please do check to make sure that contracts are arranged with the employer, not the employee!