Given the increased cost of living and increases in National Insurance have you considered tax efficient ways to reward your employees rather than pay rises? Or perhaps you’re considering a temporary increase to pay to help support employees with the increased cost of living, or are looking for tax efficient ways to extract funds from your own limited company?
Providing benefits can often come with unexpected or unwelcome tax charges, therefore, when looking at rewarding your employees or ways of withdrawing profit from your own company, it is useful to know the impact of doing so.
This article summarises what perks may be beneficial from a tax perspective and the implications of making one-off or temporary payments. Although it is also useful to consider that there are also other perks you can offer that don’t require a direct cash outlay, such as increasing the number of days annual leave they’re entitled to.
One off payments and temporary increases to pay
- Helps avoid ongoing contractual costs
- No thresholds to consider
As a result of the increase in fuel costs and expected significant increase to our cost of living, you may be considering pay rises or bonuses for your staff. However, the risk of providing a pay rise is that if costs reduce again you are committed to paying the higher salary, by way of a change in their terms and conditions of employment. In addition, if an employee is regularly awarded a discretionary bonus this could become an implied contractual term through custom and practice.
Instead you may wish to consider a temporary policy to cover, for example, additional fuel costs, which could then be reviewed after a set period and revoked. These additional temporary payments will be subject to tax and national insurance (NI) in the normal way, however, they may not be subject to pension contributions depending on what basis you’ve chosen pensionable income to be on. You may need to check with your pension provider.
When making these types of decisions, as well as considering the tax implications you should ensure you are aware of any legal issues. On this subject, Sarah Cook, Managing Director at HR People Support Ltd says “we would suggest that employees’ terms and conditions are only changed on a permanent basis, or it risks undermining the mutual trust and confidence of the contract. You could however consider an expenses policy to cover additional fuel costs during this period of increased prices. The policy could then be consulted on and implemented temporarily, to reduce again if and when fuel costs reduce. It would certainly need to be reviewed, and definitely only put in place temporarily for a set period of time, so it doesn’t become an implied contractual benefit”.
- 100% deduction against company profits in the year of purchase (providing the car is new, fully electric and bought outright or on HP i.e. not leased)
- Very low tax charges on employees when compared with petrol or diesel cars
When an employee is provided with a company car, and they are able to use this car for personal journeys, they will be charged tax on it (known as a benefit in kind). The amount of the benefit in kind depends on the value of the car when new (the list price) and its CO2 emissions. The higher the CO2 emissions, the higher the tax charge. For the employee, these tax charges can outweigh the benefit of being provided with the car in the first place.
This is where electric cars can become beneficial. For 2022/23 their benefit in kind value is 2% of the list price (for comparison, the percentage for diesel cars can go as high as 41%). This means that an employee who is a higher rate taxpayer would only pay £320 of tax in 2022/23 on an electric car with a list price of £40,000. The tax charge for that same employee paying higher rate tax would be in the region of £6,500 if they were instead provided with a diesel car worth £40,000, but with CO2 emissions of 170g/km.
There are benefits for the company too. Provided the electric car is brand new the company can deduct the full cost of the car against profits in the year of purchase, giving a significant cash flow advantage when compared with that of petrol or diesel cars (which can easily take over 20 years to offset the initial cost against profits).
The lower benefit in kind value also means less National Insurance payable by the company. Any changes to a Company Car policy should be consulted and implemented fairly and consistently, aligned with current conditions for Company Cars.
- Tax free for the employee
- A tax efficient way of paying up to £40,000 per annum into your pension
Employers can contribute into an employee’s pension pot without any taxable benefit arising (subject to the normal limits for pension contributions during a tax year). This makes it an easy way to reward and incentivise employees, as well as potentially being a great way to extract profits from owner managed limited companies.
What’s more is that the pension contributions are an allowable expense against profits, and as such the company will receive corporation tax relief on the payments.
Working from Home
- Worth up to £312 per year for employees
- Helps employees pay towards an increased cost of living
Some employees may be able to work from home on a more regular basis, which can give rise to additional household expenses for the employee. Where the contractual place of work is their home, or there is a formal agreement in place for hybrid working, as their employer you may choose to help cover the cost of this. There is no tax or NI to pay on these payments providing the following applies:
- They regularly work from home, and there is an agreement in place with you as the employer
- The amount you give them is no more than £26 per month for monthly paid employees, or £6 per week for those paid weekly
It is possible to pay individual employees more than the above rates if they can show that actual costs incurred by working from home are greater than these rates, however, in practice this can be very difficult to do.
- Worth up to £500 per annum for employees
When an employer provides small benefits to their employees, they are exempt from tax and National Insurance providing all of the following apply:
- It costs less than £50 to provide (including VAT). This is per employee and per type of gift
- Must not be cash or a cash voucher
- It isn’t a reward for their work or performance
- It isn’t in the terms of their contract
For example, you could provide an employee with a £30 bunch of flowers to celebrate their engagement, a £50 gift card for their birthday, plus a £40 food hamper for Christmas and no tax or NI charge would arise as each type of benefit cost less than £50.
These payments would also be allowable expenses against profits.
There is an annual cap of £300 per tax year on trivial benefits provided to directors of close companies. There is no cap for employees (providing the above conditions are met). Therefore, an employee could receive 10 separate types of trivial benefits (per tax year) of £50 each tax free, but a director cannot.
It is also worth noting that whilst certain benefits may not qualify as a trivial benefit, other exemptions may apply. For example, if an employer pays for taxis for their employees when they work late this would not qualify as a trivial benefit as it is work related. However, it may qualify for the late night taxi exemption.
Annual social events
- Worth up to £150 per annum for employees
Annual events paid by the business for employees can also be exempt from tax and NI providing the following conditions are met:
- Open to all employees
- It’s an annual event e.g. Christmas party, summer barbeque
- Costs £150 or less per person
The business can put on more than one annual event without any tax or NI implications providing the total cost is still £150 or less (and the other conditions are still met).
Providing bikes to employees
- Helps employees save on fuel costs
- Great for employees who want to bike to work
Bikes can be lent or hired out to employees without any tax or NI implications as long as the offer is available to all employees, and the bike is mainly used to travel to and from work.
If this is of interest it may also be worthwhile considering the cycle to work scheme. The scheme operates as a ‘salary sacrifice’ arrangement, which means the employee would agree to give up part of their salary in exchange for the hire of the bike, thereby saving tax and NI for the employee by paying for the bike out of gross pay, rather than net pay. The business would also receive a tax deduction for the cost of the bike, and save employer’s NI on the reduced salary.
At the end of the hire period the employee can choose to return the bike, extend the hire agreement or buy the bike. This scheme also allows the employee to use the bike for personal use, as long as at least 50% of the bike’s use is for commuting to work.
The scheme includes e-bikes, so it can be a great way to help beat the increased fuel costs.
Mobile phones for employees
- Great way to help employees with their monthly bills
- No tax or NI to pay
You can provide a mobile phone to an employee without any tax or NI charges, and that phone can be used by the employee for private use. The exemption covers the phone itself, any line rental and the cost of private calls paid for by the employer on that phone.
For this exemption to apply the following must be true:
- You provide your employee with only one mobile phone or SIM card
- The phone contract is between you as the employer and the supplier
Expenses paid on behalf of employees
- Helps employees with their monthly bills
- Employees could benefit from discounts and no NI
If you pay for personal expenses e.g. private medical cover and gym memberships on behalf of an employee these will generally be taxable on the employee, and there will be NI payable by you as the employer. No NI is usually payable by the employee, although there are some exceptions.
However, paying for these types of expenses can still be beneficial as employers can often negotiate discounts making it more affordable overall. In addition, if, for example, an employee is a basic rate taxpayer they would only pay 20% tax on the benefit, which would still be significantly cheaper than funding the full amount themselves.
There’s more too…
The above list is by no means exhaustive. There are various other tax free benefits which can be provided to employees, such as long service awards for employees who have been with you for more than 20 years, annual health screening, employee suggestion schemes and workplace recreation facilities.
You can also make sure that your employees are being reimbursed for expenses they incur in the course of their employment, for example: you can pay for an employee’s qualifying professional subscriptions without incurring a tax charge, and up to £5 per night to cover incidental expenses an employee may incur when working away from home.
What to watch out for
Please be aware that there are various eligibility criteria and potential restrictions on all of the above points, and it is easy to get caught out. Therefore, we suggest getting in touch with the team here at Randall & Payne before going ahead and providing yourself or your employees with any of the above.
In addition, the above is mainly aimed at employers or directors of limited companies. If you’re a sole trader or partner in a partnership the above may work slightly differently, so again, please get in touch before going ahead with implementing any of the above.
We feel that it is also worth mentioning that as the issue of inflation does not seem to be going away and so annual pay reviews may be a thing of the past. Instead it may be more beneficial for both you and employees to benchmark and review pay on a more regular basis, being mindful of creating precedents or implied contractual terms for regular ongoing pay reviews. Pay policies should be rolled out consistently and fairly to avoid inequality and potential discrimination.
Rachel Roberts is a Senior Tax Accountant in the private client tax team and has prepared this article with input from Sarah Cook of HR People Support Ltd. If you would like to have a chat with Rachel or any member of the tax team please contact firstname.lastname@example.org or call us on 01242 776000.