Iain Rankin discusses the pros and cons of employers keeping your employees healthy.
Studies continually show that active employees improve productivity in the workplace; organisations that performed the best in the Britain’s Healthiest Companies Awards (2015) had a 24% lower cost of lost productivity.
While we could debate the validity of the metrics used in measuring this statistic, it is reasonable to assume that healthy employees will be more productive and less likely to call in sick.
Although health insurance, gym memberships and other workplace ‘perks’ often incur a personal tax charge, there are some circumstances where it can be advantageous. Most company owners will agree that the move from sole trader to company working means that the rules pertaining to claimable expenses can become far more detailed and complex.
In some cases, the rules are as straightforward as before, but others must be handled delicately.
Benefit-in-kind
Although the cost of providing access to a phone or vehicle intended solely for business use can be claimed as a company expense, healthcare of any kind is viewed as a personal expense and treated as a benefit-in-kind (BIK).
Many businesses offer access to gym facilities or gym memberships as part of their employment package to encourage staff retention and general wellbeing; some more generous employers will even offer private medical or dental insurance to their employees.
An individual in receipt of a personal benefit will incur a personal tax charge on the equivalent cash value of the benefit provided to them. Whether the individual pays income tax at 20%, 40% or 45%, the BIK charge suffered can sometimes negate the benefit of an individual paying personally.
Exceptions
Annual health check-ups, eye tests and overseas medical treatment for directors and employees can be provided without incurring a BIK charge.
Treatment required in order to carry out an upcoming contract can be exempt in some cases; but proceed with caution.
One-man companies and contractors
When paying personally, the employee would also incur National Insurance contributions (NICs) before receiving their net salary payment and subsequently paying their gym membership.
In the case of one-man companies, when the company provides the membership it incurs a Class 1A NICs charge at 13.8% on the amount paid; the employee pays only income tax on the total value of the membership paid by the employer within the tax year.
The key difference here is that, as a limited company, the employer can claim corporation tax relief on the Class 1A NICs payments, whereas an individual receives no tax relief on NICs paid.
Providing to multiple employees
Larger organisations may be able to offer a workplace gym or leisure facility for their staff. The employees are offered free access or on a paid-for basis, with no tax liability incurred. It is possible to run these In-house facilities directly by the business or via a third-party; however, the subject is outside the scope of this article.
Due to the high cost of providing in-house facilities, medium-sized businesses with a small group of employees may prefer to opt for provision of a gym membership facility elsewhere. While there is still a BIK charge on the individual, the charge can be lessened due to the fact that companies are able to secure corporate discounts for their employees. This can often be advantageous.
Securing a corporate discount for employees
As an employer you will be able to negotiate with local gyms and leisure facilities to secure a discounted membership rate to pass on to your employees. Large brands regularly offer 5-10%; some even as low as 20%; but smaller independent gyms can often offer further savings.
The discounts will vary depending on the provider, the number of individuals enrolled in membership, and the size of your business. It’s important that businesses ensure they have spoken with all potential providers in their area to ensure they are getting the best possible prices.
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Example: Gym membership Devon is the director of Standard Ltd, and currently pays £300 per year for a gym membership. Devon takes a salary of £30,000 annually, paying £3,498.20 income tax and £2,564.16 NICs. If Devon pays the membership personally, NICs of £36 have been incurred on the £300 portion of income used to fund the gym annual membership. Devon cannot claim a tax deduction on any NICs in this case, so after paying tax and gym membership, this leaves Devon with £23,637.64 net income. Standard Ltd secures a bulk discount for ten employees at a local gym via Standard Ltd, for 25% off the usual £300 annual membership fee. This equates to £225 per employee annually. Standard Ltd receives a corporation tax deduction of £42.75 (19%) per employee. Standard Ltd must pay Class 1A NICs of £31.05 (13.8%) annually on the value of each gym membership. However, Standard Ltd receives a corporation tax deduction of £5.90 (19%) on this NICs payment. The company corporation tax savings now total £42.75 + £5.90 = £48.65. Devon receives a BIK income tax charge on the cost of the membership provided; it is essentially treated as though Devon had received an extra £300 per year in salary. As Devon is within the 20% tax bracket, this comes to £60. In the end, Devon saves £300 but pays £60 more in income tax, now with an extra £240 in pocket. Standard Ltd pays £225 plus the added NIC’s of £31.05, paying £256.05 in total. Although Standard Ltd and Devon are paying £316.05 in combined costs - exceeding Devon’s initial £300 annual membership fee - Standard Ltd also reduces its corporation tax bill by £48.65, bringing the net cost to £267.40. Due to the fact that the company has more options for claiming tax relief, we can see that the effect of the Class 1A NICs combined with the discounted membership fee means that the overall cost is reduced. |
Where it falls apart
As the tax charge will vary for each individual, businesses should take care in ensuring the system is tax-efficient for all employees before proceeding. If we were to repeat the above example in the case of an employee paying tax at higher rate (40%), we’d see a different outcome.
The income tax suffered on provision of the gym membership would double, coming to £120. This additional £60 in income tax brings the overall cost to £327.40; the system is no longer tax efficient and the employee should pay the membership fee personally.
Conclusion
Ultimately, companies seeking to provide healthcare or gym memberships to their employees must take care to ensure that they are benefitting their employees and themselves. While encouraging fitness and wellbeing has potential to increase workplace productivity and reduce sick-day rates, if an employee is already an active person, the business must ensure that providing such services includes a financial incentive.
Failure to plan a proper tax strategy can result in unwelcome tax charges on employees.
Practical tip
Local businesses often provide better business deals than large companies. Once you have identified the best deal in your area, speak to an accountant or tax adviser to determine whether your plans are tax-efficient.
