How to Benefit Employees – Tax
Efficiently!
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!
We have not touched here on the tax-free
reimbursements available for use of home as office – for more on this, see
Jennifer Adams’ detailed article in the December 2012 issue.
Background
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.
Trap :
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.
Mobile telephone
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.
Trap :
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.
Work-related
training
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.
Conclusion
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!
Practical Tip:
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.
Lee Sharpe
