Today the remuneration of many directors and employees comprises a package of salary and benefits.

Essentially two tests must be applied in determining the tax implications of any benefit.

  • Is the benefit taxable?
  • If the benefit is taxable, what is its taxable value?

In this factsheet, we give guidance on some of the main benefit in kind rules and indicate some common types of benefits.

It is not intended to be an exhaustive guide and any decisions should be supported by professional advice appropriate to your personal circumstances.

Setting the scene

All earnings of an office or employment are taxable. Where they are not in cash it becomes necessary to put a value on them.

As a general rule unless the benefit can be converted into cash there is no taxable benefit. Where it is convertible into cash the taxable amount is the resale value.

To prevent avoidance, additional legislation charges certain other benefits to tax. The detailed rules are complex. We can advise on structuring remuneration packages, including benefits, in a tax efficient way.

Reporting

Employers are required to notify HMRC of benefits provided to directors and most employees by completing forms P11D annually.

Penalties can apply where the forms are submitted late or are incorrect.

The full amount of any benefit or reimbursed expense must be reported on this form. However, where the reimbursed amounts represent genuine business expenses a claim can be submitted by the taxpayer on his or her tax return, (or in writing to HMRC if they do not receive a tax return) thus resulting in a nil liability.

Dispensations

Many expense payments do not involve a tax liability as a corresponding claim is made by the employee for amounts expended wholly, exclusively and necessarily in the performance of their employment.

A dispensation, granted by HMRC, allows certain expenses to be ignored when completing P11Ds. Commonly, a dispensation covers travelling and subsistence expenses and routine entertaining. Correspondingly, the employee cannot make an expenses claim to HMRC.

The government has announced that from 6 April 2016 there will be no tax liability on an employee for certain reimbursed expenses. This will replace the current system where employers have to apply for a dispensation to avoid having to report non-taxable expenses (on forms P11D). Also employees will automatically get the tax relief they are due on qualifying expenses payments.

National Insurance

In general, employees’ national insurance (NIC) is not due on benefits except vouchers, stocks and shares, the discharge of an employee’s personal liability and benefits provided by way of ‘readily convertible’ assets.

Most benefits are subject to Class 1A NIC payable by the employer. As this amounts to 13.8% of the taxable value of the benefit, you always need to consider the tax efficiency of providing benefits.

Please consult us for advice.

Non-taxable benefits

Certain benefits are not taxable. The most important ones are:

  • retirement benefits which are paid by an employer into a registered pension scheme
  • meals provided in a staff canteen
  • drinks and light refreshments at work
  • parking provided at or near an employee’s place of work
  • workplace nursery places provided for the children of employees
  • certain other employer-supported childcare up to £55 per week. Any formal registered childcare or approved home childcare contracted for by the employer such as a local nursery, out-of-school club or childminder may be covered by this exemption
  • in-house sports facilities
  • payments for additional household costs incurred by an employee who works at home
  • removal and relocation expenses up to a maximum of £8,000 per move
  • the provision of a mobile phone or vouchers to make available a mobile phone (limited to one phone per employee only)
  • annual social functions for employees provided the total cost of all events in a tax year is less than £150 per head.

Trivial benefits

HMRC have confirmed that they will introduce an exemption to remove trivial benefits in kind from taxation and NIC. Draft legislation has now been published for a measure which will have effect from 6 April 2016. The exemption sets out a number of conditions that must be met for a benefit to be exempt, including an upper limit per individual benefit of £50.

Qualifying trivial benefits provided to directors and other office holders of close companies will be subject to an annual cap of £300. Where the director’s or other office holder’s family or household member is also an employee of the company, they will be subject to a £300 cap in their own right. This is a change from the original proposals and addresses a potential loophole.

Taxable benefits

The following benefits are taxable on all employees:

  • any living accommodation provided, unless job related
  • vouchers
  • credit tokens.

In addition, special rules apply to tax other benefits received by directors and all but the lowest paid employees. Common types of benefits provided are detailed below.

  • Employer provided cars – this is probably the most common benefit and the taxable amount will generally be based on a range of 5% – 37% of the manufacturer’s list price (including accessories) of the car. The taxable benefit depends upon the carbon dioxide emissions of the car.There are reductions for unavailability of the car and where the employee makes a contribution towards the cost of the car.Please talk to us for further details on the application of the rules.
  • Private fuel – a separate charge applies where private fuel is provided for an employer provided car, unless the employee reimburses the employer for all private mileage (including travel between home and work). The charges are determined by reference to the percentage applying to the company car. A set figure of £22,100 for 2015/16 (£22,200 for 2016/17) is multiplied by this percentage to determine the taxable benefit.
  • Van – The scale benefit charge for the unrestricted use of an employer provided van is £3,150 for 2015/16 (£3,170 for 2016/17). Where the restricted private use condition is met no benefit arises. Where an employer also provides fuel for unrestricted private use an additional fuel charge of £594 for 2015/16 (£598 for 2016/17) applies. Please do get in touch if you would like to ensure that employee van use meets the restricted private use condition.
  • Cheap or interest free loans – no benefit will be taxed where the loan does not exceed £10,000.
  • Medical insurance – the cost of providing medical insurance is a taxable benefit.
  • Use of company assets – an annual benefit is taxed where employees have the private use of company assets. The annual benefit amounts to 20% of the asset’s market value when first made available to any employee. Insignificant private use of certain assets is not taxable.
  • Phones – private home phone bills, including rental charges, which are paid for by the employer will be taxed as a benefit.

How we can help

The taxation of employment benefits is a complex area. Ensuring that you comply with all the administrative obligations and plan in advance to minimise tax liabilities is essential. We can help you with the following:

  • reviewing existing employees’ remuneration packages for tax and NIC efficiency
  • planning flexible and tax efficient remuneration packages for key employees within your organisation
  • advising on systems for reimbursing expenses and dispensations
  • providing advice and assistance with the completion of your PAYE returns
  • negotiating with HMRC if disagreements arise and in reaching settlements.

We would welcome the opportunity to assist you with any planning and compliance matters so please do contact us.