Benefits in kind and expenses payments
Benefits-in-kind are assessed on all directors and employees.
Remuneration by way of benefits is often attractive to employees, especially if they are paying the higher or additional rates of income tax, because the benefit may either be tax free or subject to less tax.
A benefit that is not taxable is not automatically exempt from national insurance contributions (NICs).
An employer is required to complete form P11D in respect of each employee (including benefits) and for company directors, unless the benefits have already been taxed through the payroll. Benefits which are treated as pay for NIC purposes must be included on the deductions working sheet column 1A 'earnings on which employee's contributions payable'. (This should not include benefits liable to Class 1A NIC). Comprehensive records should be kept in relation to all benefits and expenses payments.
Provided the employer does no more than reimburse allowable expenses to employees and the appropriate checks are made, these are no longer to be reported on form P11D, and the employee is no longer be required to make a claim for them. As an employer you need to gain a good understanding of which expenses are allowable. You will need a good system of expense claims supported by receipts to justify the payment of expenses tax free.
Employers are able to choose whether to tax benefits in kind, such as the provision of a company car, through the payroll, known as "payrolling benefits". This purely optional, but could mean the end of P11D reporting for some employers, and is likely to be increasingly popular over the next few years.
We can tell you more about these changes to help you decide what is the right approach for your business.
There are several benefits that are not normally taxable, although the benefits must generally not be provided in return for a reduction in salary, otherwise they are taxable in full. These can be substantial. The most significant are:
- Contributions to registered pension schemes within limits (salary sacrifice acceptable)
- Car, motorcycle or bicycle parking facilities at or near the workplace
- Childcare vouchers worth up to £55 a week (£243 a month) for basic-rate taxpayers are no longer available to new entrants. You may be eligible for tax-free childcare instead.
- Compensation/termination payments up to £30,000
- Welfare counseling services (with restrictions)
- Staff canteen and dining facilities (provided they are available to all directors and employees)
- Sports facilities (provided they are available to all directors and employees)
- Relocation expenses, up to £8,000
- Long-service awards (provided they are an established practice within the firm or are in the employees' contract) up to specified limits
- Awards under suggestion schemes (but there are restrictions)
- Use of a pool car
- Use of an employer-provided mobile telephone - one mobile phone only per employee where provided
- The provision of representative accommodation (except for certain directors)
- Approved share incentive plans
- Use of cycles and cyclist's safety equipment used mainly for journeys between home and work (salary sacrifice acceptable)
- Certain bus services for journeys between home and work
- Annual parties or similar functions costing up to £150 per head (including VAT, and travel and accommodation - this is the cost for the year - not per party) per annum
- Payments towards household expenses incurred by employees working at home (generally £6 per week, £26 per month)
- Retraining expenses and courses
- Trivial benefits such as Christmas presents up to a value of £50 (excluding cash and cash vouchers)
The tax-free limit is currently £8,000 and is available per move as opposed to per tax year. In order to qualify the expenses and/or benefits must normally be paid or provided in the tax year or subsequent year in which the job starts.
National insurance relief is available on all the tax qualifying expenditure, however where the £8,000 is exceeded the excess is chargeable to Class 1A and thus payable by the employer.
Small interest-free loans
No tax is payable on 'cheap' or interest free loans to employees of up to £10,000. If this limit is exceeded at any time during the tax year a benefit in kind is chargeable for the full year, not just the period during which the limit is exceeded. The amount of benefit is calculated as an interest charge of 2.25% simple.
Tax efficient benefits can assist your company's profitability by ensuring that employees receive the maximum benefit from the money spent on their remuneration, thereby helping to retain key staff members.
Most, but not all, benefits are now caught by tax legislation. Most benefits are also caught for national insurance. Every employer operating PAYE schemes should review 2020/21 Employer's Further Guide to PAYE and NICs (CWG2) - and should read it carefully.
When company cars are made available for private motoring, the taxable benefit is normally calculated as a percentage of the list price.
Increases in the benefit-in-kind rates over the last few years have made the provision of a company car very expensive in tax terms, and previously not worthwhile for many employees.
However, from 6 April 2020, changes to encourage a shift towards environmentally-friendly motoring have completely changed the position in some cases. The current benefit in kind percentage for a fully electric vehicle is 0% and other hybrid vehicles (depending on the number of electric miles) also benefit from potentially low benefit in kind charges.
Where an employee is also provided with fuel for private use in the car he or she is taxed on the same percentage applied to a standard value regardless of the value of the fuel used. There is no such charge for a fully electric vehicle.
Class 1A NICs must also be paid by the employer on the car and fuel benefits. National insurance planning - and don't forget that VAT is payable based on a special scale charge for fuel provided for private use.
If a company van is made available for private use a standard taxable benefit of £3,490 applies. There is a further benefit of £666 where fuel is provided for private use. If the van is electricity powered the current scale charge is £2,792.
There is no charge for employees who have to take their van home and are not allowed other private use or the extent of private use is 'incidental'. There is also no charge for use of a commercial vehicle of more than 3.5 tonnes gross weight, so long as the employee's use is not wholly or mainly private.
Employees need to put in claims on their own tax returns or tax codes for expenses incurred in the performance of duties if these have not been reimbursed by the employer. These claims are to be made through the personal tax account in future (as yet unspecified).
These claims are to be made through the personal tax account. In the meantime, employees not within self-assessment should use form P87 (tax relief for expenses or employment where these are less than £2,500 - any greater and claim must be made through the self-assessment tax return) instead.
Valuation of benefits
The rules for valuing employee benefits provided in conjunction with salary sacrifice or in circumstances where an employee could choose a cash alternative are to change are the higher of:
• the existing tax value
• the cash alternative or salary foregone.
This does not apply to employer pension contributions, employer provided pensions advice, employer provided childcare and cycle to work. Neither do these rules apply to ultra low emission vehicles.
There is protection in respect of arrangements made before April 2017. However this protection will lapse when the agreement comes to an end or is renewed, while arrangements in place for low emission cars, accommodation and school fees are protected until 2021, unless the agreement comes to an end before that date.