In these uncertain times for business, it is important to keep employees motivated. Where pay rises cannot be given, or the amounts provided are limited, extra benefits for employees can improve staff morale, but it is important to also understand the tax implications for employees and employer says John Davison.
The general rule is that you have to pay tax and National Insurance (NI) on expenses paid and benefits provided to employees. There are different rules for what you have to report and pay depending on the type of expense or benefit provided.
Tax is not payable on trivial benefits. These are benefits that are not:
A cost of more than £50 to provide;
Cash or a cash voucher;
A reward for work or performance; and
In the employee’s contract.
Trivial benefits provided regularly (such as end of month drinks) could be regarded as being a reward for work so will not be a trivial benefit. Contractual benefits may include situations where individuals are required to work early or late once a month (say to prepare for the monthly accounts) and the employer agrees to provide a meal or snack and consequently not qualifying as a trivial benefit. But, where the workplace provides a staff canteen and free or subsidised meals are provided to all staff then this would be a tax-free benefit.
Trivial benefits are gifts to employees and not a part of a promise. For example, gift cards, costing £50 or less, can be given to employees; and Christmas or birthday gifts are frequently treated as trivial benefits. Several trivial benefits a year can be given and their value is not combined for the £50 limit. Where the benefits are provided to a director of a close company (or a member of their family or household) there is an annual cap of £300.
Exemptions have replaced dispensations. Dispensations do not apply after 5 April 2016 but expenses that were covered by the dispensation will normally be covered by an exemption. Any bespoke rate agreed with HMRC as part of the dispensation will still apply, but that bespoke rate only being valid for up to five years up to the date it was agreed.
Business expenses and benefits that are exempt include:
Business entertainment expenses; and
Uniform and tools for work.
The exemption will apply where paying a flat rate to the employee as part of their earnings which is either a benchmark rate or a bespoke rate agreed with HMRC or where paying the employee’s actual costs.
Other exempt expenses
Some other expenses are also exempt. Most of these will not be subject to tax or NI and there is no need to report the report the expense. These include:
Car parking – Car parking expenses for parking at or near the workplace, or when on a business journey.
Accommodation – is normally taxed, but where it is usually provided at the place of work (such as agricultural workers, vicar’s accommodation at the parish or publican’s accommodation above the pub) or where it is necessary for security it can be exempted from tax and NI.
Office equipment – Office equipment provided for business use is exempt. This includes computers where there is no significant private use.
Bicycles – are exempt where available to all employees to enable them to get to work. This can be a part of a cycle to work scheme ( https://www.gov.uk/government/publications/cycle-to-work-scheme-implementation-guidance ).
Business travel – Amounts at or below the HMRC approved rate are not subject to tax. The current rates are 45 pence per mile for the first 10,000 miles, and 25 pence for mileage in excess of this. No NI is payable on amounts of 45 pence or less no matter the mileage. Different rates apply to motorcycles and vans.
Child care – Workplace nurseries are exempt (subject to certain conditions) and commercial child care or vouchers are also exempt if the employee joined the scheme before 4 October 2018.
Staff suggestion schemes – These are exempt from tax and NI for two types of awards. Encouragement awards of up to £25 to employees for special efforts or for good ideas. Financial benefit awards of up to £5,000; the amount that is exempt is the greater of 50% of the amount that is expected to be saved in the year after the idea is implemented or 10% of the saving in the first five years after implementation.
Long-service awards – This is exempt where the award not a cash, it is worth less than £50 and the individual has worked for at least 20 years and they have not previously had a long-service award.
Health benefits – There are a variety of health benefits that are exempt from tax and NI. These include annual medical checks or health screening, eye tests for employees using computer screens and any necessary glasses or contact lenses, treatment or insurance for injuries or diseases that result from work, including treatment when working overseas and up to £500 to help a person to return to work.
Mobile phones – Where the employee is provided with only one phone or SIM card and the phone contract is between the employer and the supplier.
Annual celebrations and parties – These are exempt where they cost £150 or less per employee, they are annual events and open to all employees. Where there is more than one location or department and several events are held, these can still be exempt as long as all employees can attend one of them. Where more than one event is held in the year the costs are to be aggregated and the £150 per employee limit applies to the aggregate amount.
Other items that can be exempt from tax and NI include:
Uniforms and protective clothing;
Compensation for injuries incurred at work;
Counselling for welfare issues that is available to all employees. This does not include advice in respect of tax, legal services, financial matters, medical issues of recreation;
Home phones used for business calls only;
Incidental overnight expenses up to £5 for UK travel and £10 for overseas travel;
Items provided to disabled persons to enable them to work;
Certain loans to employees;
Some parking costs, including spaces provided at or near work, or parking expenses incurred on business journeys, although these may be required to be reported;
Relocation costs of up to £8,000 on qualifying costs;
Sporting and recreational facilities (but excluding motor vehicles, boats or aircraft) that are open to all employees but not the general public;
Professional subscriptions that are on HMRC’s list (https://www.gov.uk/government/publications/professional-bodies-approved-for-tax-relief-list-3) or agreed with HMRC; and
Work related training.
Maximising what can be provided exempt from tax and NI can be a cost effective way of providing extra benefits and rewards for employees. The rules for exemption from tax and NI, however, can be complex and it is advisable that advice is sought to ensure that all conditions are met. Furthermore, it is important to ensure that any benefits that are required to be reported are reported (usually using a P11D). Furthermore there are obviously costs to the provision of the benefits and these need to be costed before they are provided.
Last reviewed 18 October 2019