Tax-Efficient Benefits for Employees

With the cost of living rising and National Insurance (NI) rates increasing, you might be contemplating a temporary pay boost to support your staff or be seeking tax-efficient methods to extract funds from your limited company. However, providing employee benefits can sometimes lead to unexpected and unwelcome tax liabilities. This article will evaluate tax-efficient options and explain the consequences of making one-off or temporary payments.

Please be aware that there are various eligibility criteria and potential restrictions on how to provide tax-efficient employee benefits. The following information is also aimed at employers or directors of limited companies, so if you happen to be a sole trader or a partner in a partnership, the application of these benefits may work slightly differently. To avoid getting caught out, it’s worth seeking professional advice – book an appointment with our friendly team online or carry on reading for further information. We can also help you with Payroll Management and Bookkeeping Services.

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Pay Rises and Bonuses vs. One-off or Temporary Pay Increases

Are you considering pay rises or bonuses for your staff to help them manage escalating fuel and living costs? Even though a pay rise is always welcomed, this could create a commitment to maintain a higher salary level, potentially altering the terms and conditions of employment. Additionally, frequently awarding discretionary bonuses could establish an implied contractual term through custom and practice.

An alternative approach to consider is implementing a temporary expenses policy designed to offset, for instance, increased fuel prices. 1) There won’t be any thresholds to consider, and 2) this policy could undergo periodic reviews and be subject to cancellation after a set time period, avoiding ongoing contractual costs. While these temporary payments will be subject to the usual tax and NI, their status regarding pension contributions will depend on the chosen pensionable income basis, requiring consultation with your pension provider.

Petrol or Diesel Cars vs. Electric Cars

When an employee is granted the use of a company car for personal purposes, they are subject to a tax known as a benefit in kind (BiK). The BiK’s value depends upon factors such as the car’s original value (list price) and its carbon dioxide (CO2) emissions. The higher the CO2 emissions, the greater the associated tax liability. This can sometimes result in the tax charges outweighing the advantages of having access to a company car.

This is where electric cars come into play as a more favourable option. For the 2023/24 tax year, the benefit in kind value for electric cars stands at a mere 2% of the list price. By way of comparison, diesel cars can attract a percentage as high as 37% (unless RDE2 compliant).

The advantages extend to the company as well. When a brand-new electric car is bought (outright or on HP, not leased), the company may be able to deduct the entire cost of the vehicle from its profits in the year of purchase. This represents a substantial cash flow advantage compared to petrol or diesel cars, which can take more than two decades to offset the initial cost against profits. Plus, the lower BiK value translates to reduced NI contributions payable by the company.

Pension Contributions: Tax-Free and Deductible Expenses

Employers have the option to make contributions to their employees’ pension funds without triggering any taxable benefits (within the standard annual limits for pension contributions in a given tax year, currently £60,000 for the 2023/24 tax year). This provides a straightforward means of rewarding and motivating employees while also serving as a potentially advantageous method for withdrawing profits from owner-managed limited companies.

These pension contributions, if made wholly and exclusively for trading purposes, may also qualify as deductible expenses when calculating profits. As a result, the company becomes eligible for corporation tax relief on these payments.

Work from Home: Tax-Free Expenses

Following the pandemic’s impact on working patterns, many employees may find themselves working from home more frequently, leading to increased household expenses. In cases where an employee’s contractual work location is their home, or a formal hybrid work agreement is in place, as an employer, you may choose to contribute to these expenses (up to £312 annually per employee). These payments incur no tax or NI liabilities, provided the following conditions are met:

The employee consistently works from home, and there is an agreement in place with you as the employer.
The amount you provide does not exceed £26 per month for monthly-paid employees or £6 per week for weekly-paid employees.

If an employee can demonstrate that their actual work-from-home expenses exceed these limits, you are able to offer higher amounts than the stated rates; however, this can be difficult to do in practice – please contact us for further advice.

Tax-Free Trivial Benefits

Trivial benefits (small benefits) provided by employers – valued at a maximum of £500 annually per employee – are exempt from tax and NI, granted that the following criteria are met:

The cost is less than £50, including VAT, per employee per type of gift.
It must not be in the form of cash or a cash voucher.
It is not a reward for their job performance.
It is not in their contract’s terms.

For instance, you could gift an employee a £30 bouquet to celebrate their wedding, a £50 gift card for Christmas, and a £40 food hamper for their birthday. In each case, no tax or NI liability would apply because each type of benefit costs less than £50.

Additionally, these payments can be counted as allowable expenses against profits. However, there is an annual limit of £300 for trivial benefits provided to directors of close companies in a tax year. Consequently, an employee could receive up to 10 different types of trivial benefits (per tax year), each valued at £50, entirely tax-free, whereas a director cannot.

It’s important to note that while certain benefits may not qualify as trivial benefits, other exemptions may apply. For example, if an employer covers taxi expenses for employees working late, this would not be classified as a trivial benefit since it is work-related, but it may qualify for the late-night taxi exemption.

Tax-free Social Events (Annual)

Annual social events paid for by the company – at a maximum value of £150 per year per employee – can also qualify for tax and NI exemptions, provided the following criteria are met:

The event is open to all employees.
It is an annual occurrence, such as a Christmas party or a summer barbecue.
The cost does not exceed £150 per person.

The business can host multiple annual events without incurring tax or NI liabilities as long as the total expenditure remains at £150 or less per person and the other conditions are still met.

Bikes for Employees

Encouraging employees to cycle to work will help to reduce their fuel expenses significantly. Loaning or renting bikes to employees incurs no tax or NI implications, provided the offer extends to all employees and the primary use of the bike is for commuting.

You could also consider the Cycle to Work Scheme (including e-bikes) for added advantages. This scheme functions as a ‘salary sacrifice’ arrangement, where employees opt to give up a portion of their salary in exchange for bike rental. This not only saves taxes and NI for employees by deducting the bike’s cost from gross pay rather than net pay but also grants the business a tax deduction for the bike’s expense and reduces the employer’s NI on the lowered salary.

At the end of the rental period, employees have the flexibility to return the bike, extend the agreement, or purchase the bike. The scheme permits personal use of the bike as long as at least 50% of its usage remains for commuting.

Providing Employees with Mobile Phones

There are no tax or NI charges associated with providing an employee with a mobile phone (which can also be used for personal use). This exemption extends to cover the phone device itself, any associated line rental fees, and the cost of private calls covered by the employer on that phone.

To qualify for this exemption, the following conditions must be met:

You provide your employee with just one mobile phone or SIM card.
The phone contract is established directly between you, as the employer, and the service provider.

Personal Employee Expenses

When employers cover personal employee expenses, such as private medical insurance and gym memberships, these benefits typically incur tax liabilities for the employee and NI contributions for the employer. Usually, employees do not have to pay NI on these benefits, although there are exceptions.

Providing these kinds of benefits can still be advantageous, as employers often have the ability to negotiate discounts, making these services more affordable for employees. Additionally, if an employee falls into the basic rate taxpayer category, they would only be subject to a 20% tax on the benefit, which remains considerably cheaper than paying the full cost themselves.

Other Employee Expenses

There are many other tax-free benefits you can offer employees beyond the list mentioned. These may include:

Long-service awards for employees whom you have employed for over two decades.
Annual health screenings.
Employee suggestion schemes.
On-site recreational facilities.

It’s also important to ensure that your employees are appropriately reimbursed for expenses they may accrue during the course of their employment with you. For example, you can cover an employee’s qualifying professional memberships without incurring any tax implications, and you can also reimburse up to £5 per night to offset miscellaneous expenses an employee may encounter when working away from home.

It’s also worth considering other perks that don’t require a direct cash outlay, such as an increase in annual leave entitlement, but some of these may still be subject to tax and NI liabilities.

Need Advice on Tax-Free Employee Benefits?

If you’re seeking guidance on providing tax-free employee benefits, our friendly team are here to help. We can also help with Year End Accounts, Bookkeeping Services, Payroll Management, and much more. Get in touch with us today, either through our online booking form, by calling 01743 562430, or by emailing hello@mercianaccountants.co.uk.