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Tax-Free Benefits in Kind Guide from Taxcafe

Tax Guide from Taxcafe

A BENEFIT-IN-KIND is a non-cash benefit received by an employee. The most common benefit-in-kind is probably a company car, but there is a whole range of others to be considered.

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Putting It Through the Company

If a benefit-in-kind can provide an overall tax saving then both the employee and the employer may benefit. Look at it this way: if you can give your employees something they want at less cost to you than paying cash wages, then you’ll save money and they’ll be happy. Pass on a little bit of the saving to them and they’ll be really happy. Tax savings and a happy workforce; it doesn’t get much better than that!

For something to be taxed as a benefit-in-kind, it must not be readily convertible into cash and the employer also generally needs to contract with, and pay, the supplier directly. If the employer pays a personal liability of the employee, this is usually treated as if it were simply extra salary. So there’s no advantage in paying your employee’s mortgage instead of giving them a cash bonus.

So What is the Benefit?
All benefits-in-kind provide at least one tax saving: whilst most benefits are subject to both Income Tax and employer’s Class 1A National Insurance, they are all exempt from employee’s National Insurance. Currently, this provides an 11% saving for basic rate employees and 1% for higher rate employees. From 6th April 2011, those savings will increase to 12% and 2% respectively.

For example, let’s say that all of your basic rate employees would like satellite television. You contract directly with the supplier to provide this service and it costs £500 a year per employee. Adding in employer’s National Insurance at 12.8% means that it actually costs you a total of £564, although you will get tax relief for this expense.

The satellite TV is a taxable benefit-in-kind, so the employees will each have a tax bill of £100, but it’s still like giving them an after-tax pay increase of £400. To give them that pay increase in cash would actually cost you £654, so you’re making a saving of £90 per head.

Better Benefits
Some benefits provide even better savings because they’re not taxable in the hands of the employee and don’t give rise to employer’s National Insurance either. This class of benefits tends to be pretty restricted but they’re well worth considering as the total tax savings can add up to 43.8% for basic rate employees or 53.8% for higher rate employees (even up to 73.8% in some cases from 6th April 2010).

The pick of this bunch must undoubtedly be pension contributions, but other things to consider include: provision of a parking space; annual functions (up to £150 per head); one mobile telephone; qualifying child care; training expenses; certain relocation costs; incidental overnight expenses (£5 per night in the UK, £10 per night overseas) and luncheon vouchers (up to 15p per day).

Health Benefits
The Government likes to encourage employers to look after their workforce (it reduces the burden on the NHS), so a number of health-related benefits enjoy tax-free status, including one health screening and one medical check-up per year, as well as eye tests and corrective glasses (where such tests are required under health and safety legislation).

On Your Bike
Employers can also provide a tax-free bicycle and cycling safety equipment where the employee uses the bicycle mainly for home to work or business travel. On top of this, the employer can provide a meal and refreshments on a designated ‘Cycle to Work’ day (even if the employee only uses the bike for part of their journey!)

Other Beneficial Benefits
Some of the tax-free benefits may not appeal to you or your employees so the next area to look at is those benefits which are taxable but which may still yield an advantage due to special rules that fix the amount on which tax is paid.

Loans to Employees
There is no taxable benefit on loans to employees up to £5,000. For loans which exceed this amount at any point in the tax year, the benefit-in-kind is calculated based on interest at the ‘official rate’ less any interest actually paid by the employee.

The current ‘official rate’ is just 4.75%: considerably less than the employee is likely to be able to get anywhere else, so we can immediately see what a tax efficient benefit this is.

Let’s say you have a valued employee who urgently needs to borrow £10,000 and you agree to lend the money to them interest free. The annual benefit-in-kind on the loan would be just £475 (£10,000 x 4.75%). Even for a higher rate employee the tax cost would be just £190 (£475 x 40%).

The cost to you would be £61 in employer’s National Insurance (£190 x 12.8%) plus your own interest cost on the £10,000 lent to the employee, but the reward in terms of productivity, loyalty and staff morale could be immense, especially when you consider that loans from conventional sources are currently as scarce as hen’s teeth!

The minimal tax cost for both employer and employee makes loans to employees a benefit-in-kind with a real benefit but, if you want to see a tangible saving, consider this: If that same employee resorted to borrowing £10,000 on a credit card, the annual interest cost could be £2,000 or more. To fund that interest after tax, the employee would need a payrise of £3,390 and, when you add in employer’s National Insurance, that would cost you £3,824.

Naturally, you’re not obliged to give them that pay rise but, if they’re a key employee, you can readily see how much cheaper it is to keep them happy by lending them the money yourself.

Asset Loans
Perhaps one of your employees is a talented pianist and would like to advance their hobby to a higher level. You could purchase a ‘top of the range’ Steinbeck and lend it to them. As the ownership of the asset stays with you, the cost is not treated as part of the employee’s remuneration and is therefore not subject to PAYE.

The value of the benefit is calculated at 20% of the initial market value (usually the cost) of the asset. If the piano cost £20,000, for example, the annual benefit-in-kind charge would be £4,000. The actual tax cost for a higher rate employee would then be £1,600 (£4,000 x 40%).

Gifts or Sales
If you give an asset to an employee that you had previously been lending to them, the benefit-in-kind arising is the greater of the asset’s market value at the date of gift, or its market value when first lent less the amounts already charged as benefits-in-kind.

For example, after two years you decide to give that piano to your employee. It is now worth £15,000, so this is the benefit-in-kind charge on the gift as it is more than the original cost of £20,000 less the £8,000 of previous benefit-in-kind charges (£4,000 x 2).

The cost of an asset for these purposes must include VAT (even where the employer reclaims it) but any amounts which the employee pays for the asset will reduce the benefit-in-kind charge.

Of course, the rules for assets loaned to employees don’t just apply to pianos: they apply to most assets except those with their own special tax regime (such as cars, vans, mobile phones, bicycles and computers lent prior to 6th April 2006).

Bulk Discounts
Most other benefit-in-kind charges are based on the cost of the benefit to the employer. In many cases, the tax savings are enhanced by the fact that the employer can purchase goods or services more cheaply than an individual employee.

A good example of this is medical insurance. As a caring employer, you may wish to provide your workforce (and their families) with private healthcare. Although the cost of insurance purchased directly by an individual would be much higher, your employees will only be taxed on your (much reduced) cost.

This is just one of the many ways in which benefits-in-kind can be used to provide real benefits to both employees and their employers. Now, where is that cycling catalogue?

Beneficial Tax Relief
The cost of providing a benefit is generally an allowable expense for the employer. It doesn’t matter how strange or unusual the benefit is: because it is provided for the benefit of employees, it is a legitimate business expense.

The only exceptions to this arise in a few cases where there is a personal relationship between employer and employee, or where private company directors provide themselves with a benefit that is not available to any other employees. Nevertheless, some benefits provided solely to directors can be extremely tax efficient.