One key feature of rewarding staff in a tax efficient way is the use of exempt fringe benefits. These can either be made available to all staff or alternatively by allowing employees to tailor their package by giving up salary in return for specific benefits. The use of certain benefits can also result in a cost-efficient package from an employer’s perspective, as well as making a company more appealing to prospective and current employees.
For a benefit to be classified as ‘tax-efficient’ it should normally have the following characteristics:
- Be exempt from employee income tax
- Be exempt from both employee and employer National Insurance Contributions
- Provide a tax-deductible expense from business profits for the employer
This is a list of the main tax-exempt benefits:
- Christmas parties and annual dinners for staff generally, provided the cost per head does not exceed £150 pa. The cost of all staff functions over a year must be aggregated.
- Childcare vouchers up to £55 per week for basic rate taxpayers, £28 per week for a higher rate taxpayer and £25 per week for additional rate taxpayers.
- Health-screening and medical check-ups up to one per year. Note, however, that private medical or dental schemes paid on behalf of an employee are fully taxable.
- Job-related living accommodation where it is necessary for the proper performance of an employees duties or is customarily provided for the better performance of duties
- Certain personal expenses incurred by employees while away overnight on the employer’s business, such as calls home, laundry and newspapers up to £5 per night in the UK and £10 overseas if incurred while working overseas.
- Company vans provided mainly for business use where private use is restricted to commuting, with any other private use being insignificant.
- Electric company cars with a zero CO2 emission rate and genuine ‘pool’ cars.
- Loans with a beneficial interest rate provided the amount is below £10,000 throughout the tax year.
- Long service awards provided the period of service is not less than 20 years, and the cost of the award does not exceed £50 per year of service. The award can take the form of a tangible article or shares in the employing company.
- WWhere an employee regularly works at home, under agreed flexible working arrangements, an employer may pay up to £4 per week tax free to cover the costs of additional heating and lighting without supporting evidence.
- Mileage allowances up to 45p per mile for first 10,000 pa and then 25p thereafter. Any excess paid above these limits is liable to income tax. Note where an employer pays less than the official rates, the employee may claim the shortfall as a taxable deduction.
- The provision of one mobile phone to an employee, including line rental and calls paid directly by the employer, is regarded as exempt. It should be noted that the exemption does not apply where the contract is in the name of an individual employee. HMRC’s interpretation of a ‘mobile phone’ for this purpose now includes so-called smartphones such as iPhones and Blackberrys.
- The provision of a car parking space provided at or near the place of work, including the reimbursement of the cost of such a parking place.
- Employer pension contributions on behalf of an employee into an approved pension scheme.
- Certain relocation and removal expenses up to £8,000 including legal costs of disposing of the old premises and acquiring another, cost of replacing domestic goods and interest on a bridging loan.
- The provision of subsidised on-site canteen facilities provided that they are available to all employees.
- Sports facilities generally available to all employees and members of their families and households. Note however the exemption does not apply to facilities open to the general public.
- Welfare counselling made available to all employees generally on similar terms is exempt from tax. For this purpose, welfare counselling excludes medical treatment as well as financial and legal advice.
- Work-related training expenses, including external course plus any travelling and subsistence costs incurred by an employee.
- Nursery or playscheme places provided by the employer and open to all the employees. The employer must make the premises available or in conjunction with a voluntary body or local authority.
A detailed HMRC tax guide ‘480 ~ Expenses and Benefits’ is available to download from their website by clicking on the following link: