Benefits in Kind
- Employee benefits and benefits in kind (also called fringe benefits or perks) are various non-wage compensations provided to employees in addition to their normal wages or salaries.
- The term is used by H M Revenue and Customs (HMRC) to refer to non cash payments to employees such as the use of a company car, accommodation, entertainment or other services.
Benefit of a benefit
As part of a remuneration package it can help motivate and retain key employees but can also have tax advantages for the employee and employer.
Some benefits are exempt from tax and therefore the employer can provide the same level of remuneration overall by substituting some salary with benefits for a lower overall cost.
Some benefits are ignored for national insurance purposes, it is therefore cheaper for an employee to receive such benefits instead of a salary increase. The employee saves his 12% primary contribution (2% if upper earnings threshold exceeded) and the employer saves his 13.8% secondary contribution.
Tax free benefits
As long as certain criteria are met the following are exempt from tax:
- one mobile phone available for private use
- payments to registered pension schemes
- staff entertainment less than £150 per head per year
- childcare facilities and childcare vouchers within certain limits
- various travel costs such as late night taxi’s
- provision of bicycle and safety equipment for home to work travel
- payments for certain training courses
- one health screening or medical check up
- eye tests, spectacles or contacts where required by health and safety and available to all.
Salary sacrifice is an arrangement where an employee gives up his right to receive part of their cash salary in return for the employer providing some non cash benefit of similar value.
This is usually entered into to convert salary that is subject to income tax and employee and employers class 1 national insurance to an exempt benefit or one that attracts NIC only payable by the employer.
A benefit is only exempt from tax if it is available to all employees such as bikes provided for travel to work or childcare vouchers.
A benefit only attracts class 1 NIC (12%) payable by an employee if it is classed as earnings. To be classed as earnings it is usually a readily convertible assets (RCA) (see below). If it is not an RCA it is only subject to class 1A NIC (13.8%) payable by the employer.
Readily Convertible Asset – (RCA) – any asset which is likely to give an opportunity to realise a sum of money similar to the cost of the asset.
Childcare vouchers (a salary sacrifice example)
The first £55 per week of other employer arranged childcare or childcare vouchers is tax free. For higher or additional rate taxpayers this reduces to £28 and £22 respectively to give the same £11 of tax relief per week.
This is available to pay for childcare for children under 18 and under parental responsibility of the employee and can include after school or holiday supervision.
This saves the employee paying tax and class 1 NIC at 12% (or 2% if upper earnings threshold exceeded) on that amount of salary per week and the employer also saves class 1 secondary NIC at 13.8%.
PAYE Settlement Agreement
Where a benefit provided by an employer is irregular, minor or it would be impractical to tax on each individual employee an employer can apply to HMRC for a PAYE Settlement Agreement. This allows the employer to suffer the tax on behalf of the employee.
This is beneficial for example when giving the employee an award or gift when it would seem unreasonable to then deduct a proportion for tax purposes.
The tax payable by the employer is due by 19 October (22 if paying electronically) following the end of the tax year.
When an employee incurs a business expense personally and is then refunded by the employer this would normally have to be included on form P11D and then reclaimed by the employee on a tax return. To avoid this an employer can apply to HMRC for a dispensation which removes the requirement for an employer to report expenses and benefits paid to an employee on a P11D and from paying the associated tax and NIC’s where an employee would be entitled to a full tax deduction.
This can be used for business use of home telephone and subsistence payments for example.
P11D’s are due to be filed with HMRC and a copy provided to the employee by 6 July following the tax year and any class1A is payable by the employer to HMRC by 19 July (22 if paying electronically).
The above is intended as a general guide and the rates and examples are subject to change in line with changes in legislation.
If you have any questions regarding benefits or any other matter please let me know I would be delighted to help.