Tax free benefits for employees

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1 Tax free benefits for employees Friday 16 May Clive Relf s Profile clive.relf@reeves.co Clive has been a Tax Partner at for the past 25 years. are an award winning top 30 accountancy and financial services firm, with offices in Kent (including Canterbury and Discovery Park), Gatwick and the City of London with a headcount in excess of 300. Clive specialises in tax planning both for individuals and businesses and regularly lectures to a variety of audiences. Particular sector interests: construction, healthcare and professional practices. 1. Tax free benefits - the basics In principle anything given by an employer to an employee is taxable. PAYE accounts for tax and national insurance (NIC) on wages, salaries, bonuses etc. with employees receiving monies tax paid. Most benefits in kind, however, can t be taxed at source with annual forms P11d required for higher paid employees and directors. But some benefits can be enjoyed on a tax free basis. 2. Forms P11d Higher paid employees are those earning at the rate of at least 8,500 pa a figure unchanged since P11ds need to be submitted to HMRC no later than 6 July each year so by 6 July 2014 for the tax year ended on 5 April Income tax payable via individual tax returns.no employee NIC Class 1A NIC to be paid by employers by 19 July NOTE: all benefits disclosed on P11ds must be shown on VAT inclusive basis.

2 3. Tax free benefits the most common ones Refreshments at work, free car parking at work. A pool car but strictly defined. Medical and optical check-ups. One mobile phone but only sometimes see Case Study 1. Travelling expenses to temporary workplaces and subsistence costs when travelling on business. Annual parties and functions but only sometimes see Case Study 2. Interest free beneficial loans new 10,000 limit since 6 April Employer contributions to a company or employee s own pension scheme see Case Study 3. Childcare vouchers but new scheme coming in Autumn Training and course fees. 4 per week for homeworking where relevant. Trivial gifts* but what s trivial? See Case Study 4. An electric car or van but only until April Useful things to know P11d dispensations Very useful to minimise reporting obligations where legitimate business expenses are incurred in connection with employment. Available where satisfied that employees wouldn t need to pay tax on expenses paid or benefits provided e.g. travel & subsistence expenses including accommodation, mileage payments equal or below advisory rate qualifying entertainment etc. Dispensations can be backdated to previous 6 April leaving (for most) reporting requirements only for cars, private medical and loan > 10,000. PAYE settlement agreements These are useful where an employer exceeds the limits and can avoid employees being subjected to unwelcome tax/nic bills arising where they assumed benefits received had arrived tax paid. Submission deadline. *Trivial gifts could include, as specified by HMRC: a turkey (not a hamper), box of chocolates, bottle or 2 of wine (not crates), gifts or flowers on special events including Christmas, birthday or wedding (but not cash, gifts that can be exchanged for money or vouchers, unless otherwise specified see case study 4).

3 Case studies Case study 1 Mobile phone Endeavour Ltd needs all its employees to be accessible so annually meets the cost of a mobile phone. Some employees also receive ipads. 1) The company contracts directly with suppliers for most employees 2) but for others the employer reimburses expenses initially borne personally. Is there a problem here? 1) Mobile phones and ipads can be classed as tax free benefits so long as, as per scenario, the employer contracts directly with the suppliers. The employee will have no tax or National Insurance to pay even if they spend some time using these devices for purely personal use. This is the more advisable route for employers to take. 2) However as in the second scenario this tax free benefit does not apply where an employee has contracted with the supplier and later received reimbursement from the employer. A P11d form will need to be submitted no later than 6 July 2014 (for tax year ending 6 April 2014). Income tax and NI will be payable by the employee via individual tax return on the cost of rental and personal element of calls/usage (HMRC would adjust the employees tax code to credit the benefit of the gift under PAYE). The employer may decide to settle their liability by filling out a PAYE agreement (see notes). BUT this route is therefore more complex and less advisable that scenario 1. (As employees are increasingly encouraged by employers to bring their own devices into work (BYOD schemes) the law may be encouraged to adapt in future.

4 Case study 2 - Staff parties Tax Free Benefits for Employees Wilson Ltd manufactures Easter eggs and annually lays on staff functions. The costs of which are as follows: Easter party 25 Summer barbeque 37 Christmas party 100 Is there a problem here? Annual parties and other social functions classify as tax free benefits. However if it were not periodic in nature (e.g. a member of staff s leaving party) it is possible that it wouldn't apply. There is however a limit of 150 per employee. BUT strict rules apply: If the employer applies the exemption to all 3 functions, when the limit is passed the whole amount would become taxable, not just the difference. i.e. where the whole amount comes to 162 per employee, 162 would be taxable rather than just the 12 difference. SO the employer should only apply the allowance to 2 of the 3 events to keep under limit. For example it would be advisable to use the tax free limit to cover the 100 Christmas party and 37 summer barbeque (total of 137 and within the limit). The additional 25 Easter party would not count as a tax free benefit and should be considered separately. It would be taxable to the employee as a benefit in kind (would need to record on P11D form and HMRC would adjust the tax code to credit the benefit of the gift under PAYE). However the employer could settle the cost of the employees tax and NI liability by entering a PAYE settlement agreement with HMRC. (For the employer, the additional 25 would be deductible as a business expense even if this causes them to exceed the 150 limit.)

5 Case study 3 - Pensions Mrs Jones is on 30,000 pa and contributes 2,000 to her pension, with her employer contributing a further 2,000. What steps could Mrs Jones take to improve her take home pay in these circumstances? She could arrange a salary sacrifice with her employer so they pay her additional contribution directly i.e. reduce her gross pay from 30,000 pa to 28,000 pa. This would save her 250 a year in National Insurance (also in the employer s interest), which the employer could them reimburse to her indirectly by putting it into her premium. It would be advisable for the employer to cover this clearly in their handbook policy.

6 Case study 4 - Long service awards/vouchers Justify Ltd struggled with staff retention and to encourage employees to stay its practice was to give long service awards of 200 (gift voucher or goods) to each employee on the 5th, 10th, 15th, 20th etc anniversary of their employment. The payroll supervisor knows that long service awards were treated favourably by HMRC and thus assumed this could be done tax free. Is there a problem here? Long service awards can only be classed as tax free benefits for employees after 20 years of service, with a maximum of 1000 gift vouchers or goods allowed ( 50 per year of service). Therefore the long service awards given before the 20th year of service would be taxable as earnings (under payroll) if vouchers/cash or as a benefits in kind (if goods) as per case study 2 but as in case study 2, am employer may settle this liability by filling out a PAYE settlement agreement.