At a time when the cost of living is soaring, employee wellbeing is a key concern for employers. There are several tax-efficient benefits employers can offer employees with little or no subsequent compliance obligations. Here, we look at the options employers have and the tax implications.
Salary sacrificed benefits
A salary sacrifice scheme enables an employee to give a portion of their gross income to fund certain benefits, resulting in an income tax and Class 1 National Insurance (NI) saving for the employee, and an employer’s Class 1 NI saving for the employer.
There are no specific rules around the amount of salary that can be sacrificed, as long as it doesn’t reduce the employee’s cash earnings below the National Minimum Wage, so the amount can vary depending on the terms the company has in place for the arrangement. It is important, however, that before a salary sacrifice scheme is put in place that employers consult with both their HR and legal teams to ensure affected employment contracts correctly reflect the arrangement. There must be an update to the employment contract or a letter confirming what the reduced salary will be and what benefit will be given in return.
Under salary sacrifice it is typical that an employee would forgo an amount equal to the monthly lease costs incurred by the employer when using an electric car. Receiving an electric car through a salary sacrifice scheme will allow amounts to be deducted from employees’ salaries before income tax and NI deductions. As a result, from a salary sacrifice perspective, there will be an income tax and Class 1 NI saving for the employee and a Class 1 NI saving for the employer.
Because the employee is exchanging salary for the car to be provided by their employer, there will also be an income tax charge on the taxable value of the car under the benefit in kind (BIK) rules to consider. The company is also due to pay Class 1A NI on the same taxable value. However, given the low BIK % rates for electric emissions vehicles, after considering the income tax and NI savings via PAYE as well as the low taxable value on the car benefit itself, employees will often have an overall tax saving. For the employer, the saving will be on the Class 1 NI vs Class 1A NI as the latter is charged on a much lower value (being the company car benefit) as opposed to the sacrificed pay. It is important to note that these savings are available for cars with CO2 emissions of 75 grams per kilometre or less. For cars over those emissions, these savings are negated under the Optional Remuneration Arrangements (OpRA) rules.
The employee can agree to reduce their salary by an amount which is then exchanged for employer contributions to their pension fund. Like the previously mentioned electric car, pension contributions are deducted from employees’ salaries before income tax and NI deductions. This, in turn means the employee pays less tax and Class 1 NI, whilst the employer also makes a Class 1 NI saving.
Unlike electric cars, employer contributions to a registered pension scheme are a tax-free benefit. This means there is no income tax charge for the employee or Class 1A charge for the employer. Some employers, therefore, may choose to re-invest the Class 1 savings arising from the use of the salary sacrifice mechanism to further boost their employees’ pension pot with no BIK tax implications. The use of salary sacrifice for pension contributions typically sees employees increasing their overall take home pay.
Cycle to work scheme
A cycle to work scheme could provide health benefits and additional support by helping to reduce travel costs for employees.
The scheme can also be a salary sacrifice arrangement. As with other salary sacrificed benefits, it works by the employer paying for the bike (and any accessories) in full, then monthly payments to be deducted from the employee’s salary as payment for the bike before any income tax and NI deductions are made.
Participating in such a scheme is typically a tax-free benefit, meaning there is no income tax charge for the employee or Class 1A charge for the employer.
Small, irregular benefits are a common practice, seen as a token of generosity by employers providing employees with extra support through things like tax-free gift cards or supermarket vouchers. To qualify, the benefits must be provided to employees on an ad-hoc basis; the exemption would not apply to benefits gifted regularly or an ongoing basis, or where staff have a legitimate expectation that it will continue for a period. There are other conditions that must be met for the exemption to apply including:
- The value does not exceed £50 (including VAT)
- It is not in the form of cash or a cash voucher (i.e. a cheque)
- It is not a reward for work or performance
- It is not expected under the terms of an employment contract
If the benefit does not meet the above conditions, employers can still offer it but there would likely be an income tax and NI charge on the taxable benefit amount under the BIK rules. Employers should consider whether the benefits could be included on a PAYE Settlement Agreement (PSA). A PSA is an agreement with HMRC where the employer settles any tax and NI arising from the provision of a benefit on behalf of the employees. It is important to note that reporting a benefit on a PSA requires the employer to pay the tax and NI on the grossed-up value of the benefit. This can be expensive and in the case of higher and additional rate taxpayers, can be almost as much as the cost of the benefit itself.
Read our ‘Employment benefits: reporting window is just around the corner’ blog for further information on the reporting requirements arising from providing taxable benefits, including those required to be reported on a PSA.
Employers can offer a mobile phone to employees without triggering any tax or NI charges to either the employee or employer, this could eliminate a monthly living expense for an employee. It is important to note that the mobile phone remains the property of the employer with the contract strictly being between the employer and the supplier. The exemption is also limited to one phone per employee and it can’t include family members without a taxable benefit arising.
Meals at workplace canteens
Where an employer offers free or subsidised meals of a reasonable value or provides vouchers that cover the costs of buying these meals at the workplace canteen, there will be no requirements to report or pay income tax or NI, providing this benefit is offered to all employees.
Where a loan does not exceed £10,000 (a combined outstanding value) throughout the whole tax year, there will be no requirement to report or pay income tax or NI on the provision of the loan. Where the loan (or aggregation of loans between the same employer and employee) exceeds £10,000, the BIK rules would apply to determine the taxable benefit on the full value of loan.
Employers can also offer a cost-of-living payment in the form of a one-off salary bonus, which is taxable via PAYE and subject to Class 1 NI as earnings. This is more costly to the business but allows for simple administration. So, in summary employers trying to provide additional support to their people can use a range of tax efficient benefits to help them offer the most they can.
For further information, please contact Chantelle Martinez or David Smith at email@example.com.