Tax-Exempt Benefits: What are they and how do they work?
A significant number of employees will find that they receive non-cash benefits as a part of their remuneration often in the form of company cars, loans, mobile phones, private medical insurance, or contributions to a pension scheme. For the most part, an employee will pay tax on these benefits as these are benefits that were provided to them or “a member of their family or household” – meaning that if the employee managed to get their employer to provide the benefit to his/her spouse or children, they would still have to pay taxes.
The actual list of tax-exempt benefits is long, but here we will take a look at the ones which may be more familiar to our eyes:
Employer contributions to pension: Tax exemption is dependent on the pension scheme being registered. So, if the employer pays into the employees personal or occupational pension scheme, no taxable benefit arises irrespective of the employer’s level of contribution.
Company issued phones and calls.
Reimbursement of removal expenses: If, for example, an employee is transferred to another site with the employer covering expenses, no taxable benefit is incurred so long that the expense does not exceed £8,000. This exemption is actually well-defined by HMRC and can be read in further depth here. (ITEPA 2003, ss.277-285)
Workplace parking: Note that this provision also includes the cost of a ‘season ticket’ to a public car park within reasonable proximity to the workplace. Bicycle and motorcycle spaces also operate in this provision.
Subsidised staff canteens: Tax-exempt only if the canteen facilities are available to all employees and if the provision did not arise out of a salary sacrifice or other related arrangement.
Incidental expenses: Employees working away from home are exempt up to a daily limit. Currently, they are £5/night if working in the UK and £10/night abroad.
Christmas (or other annual seasonal events) parties where the cost per head does not exceed £150. Note that if the cost per head exceeds this amount, the individual is taxed on the full amount and not just the excess over £150. For example, a cost per head of £250 will result in the employee being taxed on the entire £250.
Awards from a staff suggestion scheme provided the award is no more than £5,000.
Rewards for loyalty or service: Up to £50 per year of service given an employee has served at least 20 years with the employer. Gifts given to a long-serving employee on retirement is also exempt.
Reasonable additional costs incurred from working at home (ITEPA 2003, s.316A). Employers should note that no records are required to be kept if expenses do not exceed £6/week or £312/year. This is actually a hugely relevant exemption in the current climate and has warranted a more in-depth discussion.
Other tax-free benefits can be found in HMRC’s online manual (ITEPA 2003, s237-324).
Trivial benefits are a bit different to the tax-exempt benefits listed above in the sense that they come with a few strings attached to them. HMRC are very rigid in their definition of a trivial benefit, meaning you (the employer) don’t pay tax on a benefit provided all the following criteria are met:
- The cost of the benefit is £50 or less
- It is not cash or a cash voucher
- It is not a performance-based reward
- It is not an incentive included in the employee’s contract terms
Trivial benefits don’t need to be reported to HMRC via annual P11D/(b) forms and are exempt from taxable income and Class 1 NICs. So, if you’ve made plans to take employees for dinner (or to celebrate an occasion) you won’t need to worry about tax – as long as you make sure the total is £50 or less.
Generally speaking, there is no limit to the number of trivial benefits that can be provided in a tax year (6 April – 5 April) unless in the case of an individual in a close company where a £300 annual cap is enforced. For reference, a close company is a limited company of 5 or fewer shareholders who are all directors.
It is becoming increasingly common to find companies that offer a range of optional benefits to employees as part of their remuneration package, often at the cost of utilising the salary sacrifice. The reasoning behind such a method was that the amount of tax imposed on the benefit would be lower than the taxable amount on the salary given up, which would obviously be extremely favourable if the benefit was tax-free. This results in less income tax and NICs being paid.
Trivial benefits arising from a salary sacrifice are not eligible for exemption, and the employer will have to pay income tax, National Insurance, and report to HMRC on employee P11D.
HMRC introduced the Optional Remuneration Arrangement (OpRA) which reduces tax-saving using the salary sacrifice. The OpRA applies to two arrangements:
- Type A: Where the employee gives up the right to receive earnings in return for a benefit.
- Type B: Where the employee opts to receive a benefit in place of salary.
The amount declared is also the higher of either the salary sacrificed or how much was paid for the trivial benefit.
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