Chris Thorpe outlines some important tax considerations regarding benefits-in-kind.
Whilst it is the prospect of reward that sweetens labour, a further question is what form that reward should take.
Good old pound sterling usually does the trick, but many employers will include benefits-in-kind (BIKs) in a remuneration package. Most of those BIKs are subject to income tax, in the same way as cash, but are free of employee’s National Insurance contributions (NICs) and are instead subject to employers’ NICs (i.e., Class 1A NICs). However, some are also income tax-free, offering further sweeteners to employees and company officers.
Pension contributions
Whilst not technically an ‘in-kind’ benefit, payments by an employer into an employee’s pension pot are tax-free on that employee and generally an allowable deduction for the employer.
Whilst that pension pot may not be immediately accessible, pension planning is nonetheless an important long-term factor, and generous contributions (above the legal minimum under auto-enrolment of 3%) could well appeal to many.
Tax-free BIKs
There are several non-monetary BIKs which will also appeal to many and are tax-free. The most common examples include: a private mobile or smartphone; £8,000 removal expenses; cheap or interest-free loans up to £10,000; car parking at or near the workplace; childcare facilities on an employer’s premises, and workplace gym, sports or recreational facilities.
Prior to 4 October 2018, up to £55 per week of childcare vouchers could also be provided by an employer tax-free, but after that date new joiners contribute to a pot of money to which the government makes a contribution; whilst the employer can also make contributions to this pot, such payments are taxable as salary.
Value of benefit
Most benefits are taxable, but sometimes (and hopefully) to a lesser extent than the benefit and joy it brings to its recipient. As far as HMRC is concerned, the ‘marginal’ cost to the employer is the value on which the income tax and NICs is formulated; most of the time, the marginal cost of provision will be identical to the actual cost.
This approach was illustrated in Pepper v Hart [1992] 3 WLR 1032, where the taxable benefit of a place at a private school for a teacher’s child was valued at the extra costs of providing that place, rather than the full fees.
Job-related accommodation
A valuable BIK is a roof over one’s head. If accommodation is provided to an employee (and their family), the value of the taxable benefit is the greater of the cost to the employer of that accommodation or its annual value.
However, if the provision of the accommodation is ‘necessary for the proper performance’ or ‘customary for the better performance’ of the job, it will be tax-free for employees (or full-time directors owning less than 5% of the shares). Common examples of types of employees coming under these headings are caretakers, agricultural or estate workers, armed forces personnel, police officers, boarding school teachers, prison officers and pub managers.
Salary sacrifice
Often, BIKs are provided through salary sacrifices, i.e., the gross salary is reduced and replaced with BIKs.
If a tax-free benefit can be provided in lieu of the salary sacrifice, so much the better. However, since 2017, the tax charge of a BIK provided through salary sacrifice is the higher of the taxable value of the BIK, and the salary sacrificed (except for pension contributions and advice, childcare provision, cycle-to-work scheme and ultra-low emission vehicles). These rules do not stop the employer from providing (tax-free) BIKs in addition to the full salary.
Practical tip
BIKs are very useful for employers to attract and retain employees, especially with the lack of employee NICs. Whilst there is usually a tax cost to BIKs, it can be mitigated; the benefits will often outweigh the cost, and with salary sacrifice on things like pensions contribution, it can be a valuable part of remuneration planning.
