How to Benefit Employees in a Tax Efficient Manner
While most employee perks or “benefits in kind” are taxable, there are still a few which enjoy favoured status, to the advantage of employers and employees. This article sets out some of the key benefits and reimbursements which are... beneficial!
There is a well-established regime for taxing non-monetary “perks” for employees, such as company cars. They are generally reported on a Form P11D for each employee, so that he or she will pay income tax on its deemed value. These “benefits in kind” also cost the employer, who is normally obliged to pay Class 1A National Insurance contributions (NICs) at 13.8%. But note that in most cases, the employee escapes employee NICs.
Why sacrifice your salary?
While it could be argued that there is little point in an employee giving up his or her salary in return for ordinary taxable benefits in kind, there are one or two benefits which enjoy favoured status – so are not taxable. In these cases, replacing taxable income with a valuable benefit means less tax for the employee (so effectively more net pay), and an NIC saving for the employer.
1 Childcare vouchers
One of the most popular benefits co-ordinated with salary sacrifice, the employer can provide a basic rate taxpayer with up to £243 a month (or £55 a week) in childcare vouchers which are free of tax and NI for the employee – so the full amount can be applied directly for approved childcare. £243 a month equates to £2,916 a year, so a basic rate taxpayer can take home £2,916 in vouchers, instead of just £1,982 in cash. The employer stands to save roughly £400 in NIC as well. Both parents are eligible for the vouchers, potentially saving them over £1,800 a year.
There are conditions for a voucher scheme, and higher rate taxpayers can no longer benefit as much as their basic rate counterparts. Employer-supported childcare in the form of workplace crèches or directly contracted provision also stands to benefit, although vouchers are far more common for small businesses.
2 Employer pension contributions
Here, the employer offers to contribute to a pension scheme on behalf of the employee, instead of salary. The contribution is again free of tax, and NIC. This could be to replace existing salary, or it could be an alternative way to pay a bonus. The employer can put some or all of the NIC it saves towards the pension contribution, making it even larger than the cash alternative.
Of course, the employee cannot normally access the pension fund directly but this is less of a concern as retirement age approaches.
Care is needed when drawing up salary sacrifice agreements, in order for them to be deemed effective for tax purposes, as they are frequently scrutinised by HMRC. A key point is that the sacrifice must be agreed before the employee becomes entitled to be paid the salary or bonus payment. HMRC’s own guidance in its Employment Income manual starting at EIM42750 (www.hmrc.gov.uk/manuals/eimanual/EIM42750.htm) is genuinely helpful on this issue.
For lower-earning employees such as those who are entitled to benefits, salary sacrifices may also have adverse effects.
A mobile phone for an employee is not a taxable benefit in kind, nor does it attract NIC. Only one phone per employee enjoys this favourable treatment.
A common mistake, particularly with mobile phones, is for the contract to be between the phone company and the employee. Where an employer steps in to pay an employee’s contractual liability, there may be a tax charge and an NIC charge – on both employer and employee.
Computers and office equipment at home
HMRC permits the use of office furniture, stationery, computers, etc., away from the office without incurring a tax charge provided the motivation is for business purposes and private use is not ‘significant’.
Based on the relevant guidance, HMRC appears to have a quite relaxed attitude towards what is regarded as ‘significant’ private use in this context – fairly generous examples can be found at EIM21613 (www.hmrc.gov.uk/manuals/eimanual/EIM21613.htm).
Anyone who has previously tried to claim that there is no significant private use of a company car will be amazed at the difference in HMRC’s approach.
There is a potential trap for self-employed people when it comes to training: simply put, the costs of training for updating/maintaining existing skills are allowable, while acquiring a brand new skill is not.
This distinction is irrelevant for employees (and directors) – provided the training is intended to assist the employee in his or her employment, then the cost is not a taxable benefit for the employee.
Professional fees, subscriptions, etc.
An employer can pay for an employee’s membership of professional bodies, annual subscriptions, licence fees and trade union membership, relevant to the employee’s occupation. There are lists of approved professionals and bodies, which can be found in HMRC’s manuals at EIM32880 onwards (www.hmrc.gov.uk/manuals/eimanual/EIM32880.htm).
Scale rate expenses for travel/subsistence
Many readers will be familiar with the quite stringent rules for claiming deductions for ‘travelling and subsistence’. But HMRC is prepared to agree reasonable flat rate amounts that can be paid to employees working away from home/the business. (In fact scale rates can be agreed for expenses other than travelling and subsistence, although this is relatively uncommon).
Employers can use either the ‘advisory rates’ for meals published by HMRC at EIM05231 (www.hmrc.gov.uk/manuals/eimanual/EIM05231.htm), or agree specific rates with HMRC. This can be done for the business individually, usually by taking a sample of ‘real expenses’ and agreeing an average, or sometimes when the business is affiliated with a representative body which has agreed a national rate on behalf of its members – classic examples are those for the construction industry, and for long-distance lorry drivers.
Where the employer’s business involves employees spending long periods ‘on site’, this can be a real administrative saving. However, a scale rate payment can be made only if an employee confirms he or she has actually incurred some subsistence expense.
Personal incidental expenses
While HMRC doesn’t like to admit it, there is a long-standing allowance for employees who spend nights away from home. The allowance is intended to cover miscellaneous private expenses incurred, such as laundry or the cost of calling home. The amount is £5 per night away in the UK, and £10 per night outside the UK.
• It is a round sum that may be paid free of tax and NIC.
• No receipts are required, nor does any expense actually have to be incurred – it is explicitly for private expenditure, what the employee does with the allowance is irrelevant.
Whether you employ people, or are a director or employee yourself, the items above should offer plenty of opportunities for saving tax. I am particularly a fan of personal incidental expenses, as I enjoy telling tax inspectors that there are in fact some “round sum payments” which aren’t taxable!
None of these benefits has to be arranged as part of a salary sacrifice agreement – but it does help to sweeten the deal for the employer by reducing employers’ NICs. And where a director’s or employee’s income level is such that he is at risk of having child benefit clawed back, or of losing his personal allowance, then salary sacrifice can prove particularly useful.