Mark McLaughlin looks at the trivial benefits exemption from employment income, including how the exemption applies to directors of close companies.
It is said, ‘every little helps’. This is a well-known saying about life but it also applies to tax, as there is a useful and well-known exemption from an income tax charge on employment income for ‘trivial’ benefits provided by employers.
This exemption is perhaps more helpful and wide-ranging than some employers and their employees might assume. For example, it applies to benefits provided to the employee or a member of the employee’s family or household.
There are no Class 1A National Insurance contributions (NICs) on benefits which are exempt from income tax. In addition, there is an exception from Class 1 NICs for non-cash vouchers.
The small print
Perhaps unsurprisingly for such a useful exemption, there are strings attached in the form of statutory conditions A to E (in ITEPA 2003, s 323A). Conditions A to D apply to employees, and conditions A to E apply if the employee is a director or other office holder (or family or household member) of a close company employer. Broadly, the conditions are:
A: The benefit is not cash or a ‘cash voucher’.
B: The benefit cost does not exceed £50.
C: The benefit is not part of ‘relevant salary sacrifice arrangements’ or other contractual obligations.
D: The benefit is not provided in recognition of particular employment services performed by the employee as part of their duties or in anticipation of such services.
E: This condition applies to close company employers where the employee is a director or other office holder or a member of their family or household. The benefit cost of the benefit provided to the employee (or the amount allocated to the employee where the benefit is provided to a family or household member who is not an employee) does not exceed an ‘available exempt amount’.
As mentioned, condition B is that the cost of providing the benefit (or the average cost per employee if a benefit is provided to more than one employee and it is impracticable to work out the exact cost per person) does not exceed £50.
Not so ‘trivial’!
A useful feature of the trivial benefits exemption is that this £50 limit applies per benefit, not per tax year.
For example, if during the tax year 2022/23 an employer gave an employee a cinema voucher costing £35 on their birthday in June, and flowers and fruit when the employee was on sick leave in October, costing £40, and a Christmas hamper costing £45. The total cost of the benefits is £120, but all three gifts are within the trivial benefits exemption because they each cost less than £50.
If the ‘cap’ fits
For condition E, the individual has an available exempt amount of £300. Broadly, the cost of ‘eligible’ benefits (i.e., within conditions A to D) is aggregated. If the cost of an additional trivial benefit results in the total cost exceeding the annual cap of £300, none of the benefits that result in the cap being exceeded is exempt (see HMRC’s Employment Income Manual at EIM21869).
For example, if a close company provides a director with several benefits earlier in the tax year costing less than £50 each, amounting to £260 in total, and a further benefit is subsequently provided costing £50, this final benefit is not within the £300 annual exemption and the full £50 is taxable but the earlier benefits remain exempt.
Practical tip
Members of the officeholder’s family or household who are employees of the close company are each subject to their own annual eligible benefits exemption cap of £300 (ITEPA 2003, s 323B(4)). Thus, there is a potential attraction in employing family members, such as adult children, all other things considered.
