Taxing benefits

Many types of benefits in kind (i.e. in addition to or replacing cash wages) are treated as part of gross income and subject to Schedule E income tax. Examples include company cars, health insurance, childcare, travel costs, and entertainment expenses.

If you provide an employee with anything other than pay it may count as an expense or benefit, and employers need to check whether to report it to HMRC and pay any tax or NICs on it to HMRC.

Identifying which benefits in kind are liable to tax and NICs can be a challenge. A great deal of information is provided by HMRC in print form and online via its website www.hmrc.gov.uk. However, employers should also seek independent expert advice.

Salary sacrifice

A salary sacrifice arrangement is an agreement between an employer and employee to change the terms of an employment contract to reduce an employee’s cash pay in return for some form of non-cash benefit.

For example, tax and NICs can be reduced if the employee takes benefits (e.g. childcare vouchers, company car) which are wholly or partially exempt from tax and NICs in exchange for a reduction in pay (salary sacrifice).

Anything provided to an employee under a salary sacrifice arrangement does not have to be included in PAYE submissions to HMRC: the taxable pay reported is the post-sacrifice figure.

HMRC will need to be satisfied that it is a genuine salary sacrifice, i.e. that the employee has no right to revert to the higher salary at any point during the time the benefit is available, and has not just asked the employer to use part of the salary to obtain the benefit. Both sides should take expert advice on this.

The employee should also be made aware that salary sacrifice could reduce future salary increases, pension scheme contributions and benefits, and entitlement to Tax Credits, State Pension, Statutory Maternity Pay and similar benefits. Employees will have to calculate whether or not they would be better off sacrificing salary.

Employers can also contribute up to £55 a week towards childcare costs free of tax and NICs for all employees and does not need to be reported. Childcare costs above £55 per week attract Class 1A NICs and have to be reported on form P11D.

Tax deductible and exempted benefits

The value of a taxed benefit is deemed to be the cost to the employer of providing it, including any delivery, funding or ongoing maintenance costs, less any reimbursement by the employee. Assets lent to the employee are taxed on an annual value of their use, taken as 20% of the asset’s market value when first used to provide a benefit, plus any current expenditure met by the employer to maintain or keep it operating.

There are other expenses for which employees can claim a tax deduction, e.g. computer equipment and other plant and machinery required and bought by the employee that the employer could not provide; subscriptions to professional bodies and societies relevant to the job; and special safety equipment required because of the nature of the employment.