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- There are a number of individual tax rules for all tax-efficient benefits.
- Changes to pensions and childcare vouchers affect their tax position and how employees take the benefits.
- New tax rules apply to employee share schemes.
There is a growing list of tax- and NIC-exempt benefits on offer. In February, the government launched the latest of these in the shape of an interest-free loan scheme to help staff pay their tenancy deposit when moving into a privately rented home.
But there are many specific tax and NIC exemptions applicable to different benefits, so it is important for employers to check the specific rules for each individual benefit.
So what are the key points to consider?
Salary sacrifice arrangements:
Tax-efficient benefits offered through a salary sacrifice arrangement are exempt from income tax, employer’s NI and employee’s NI. This is so because a benefit offered in this way reduces an employee’s gross pay, so less tax and national insurance is due. The employer, meanwhile, will not have to pay NI contributions on the portion of the salary that the employee sacrifices.
Employers can make contributions to occupational or personal pension plans without triggering a tax charge (providing the employee is within the annual or lifetime limit).
If the employee contributes to the scheme, these contributions, up to a maximum of 100% of earnings, are allowed as a deduction against the employee’s taxable income.
In the 2015 Budget last month, chancellor George Osborne announced that the lifetime allowance limit will be lowered to from £1.25m to £1m. From 2018, this will also be index linked.
Any excess above this limit is subject to a lifetime allowance charge of 25% tax (for group personal pension or stakeholder schemes) before being applied to provide taxable benefits. If the excess is taken as a lump sum, for example £2m, it will be taxed at 55%.
There is also an annual allowance limit on tax-relieved pension savings, which is capped at £40,000. Employer and employee contributions above the annual limit are taxed at the highest rate the employee pays: 20%, 40% or 45%.
Employees could also save tax and NI contributions by sacrificing salary or a bonus in exchange for their employer paying an equivalent pension contribution. This reduces both employer and employee NI contributions, as well as income tax for the employee.
From 6 April 2015, the rules on how employees can take their defined contribution (DC) pension savings at retirement, along with the tax rules around this, are changing.
From this date, employees will continue to be able to use some, or all, of their fund to buy an annuity, which will be payable at least for the rest of their life. When an employee buys an annuity, they can take a tax-free lump sum of up to 25% of their pension pot at the same time.
In addition, from 6 April this year, there will be no limits on how much or how little employees can draw down from their fund each year. When they put funds into drawdown, they can take a tax-free lump sum of up to 25% of their pension pot at the same time.
Employees will also be able to take money direct from their pension pot without having to buy an annuity or put the money into drawdown, and 25% of this sum will be tax free. This is known as an ‘uncrystallised funds pension lump sum’ (UFPLS).
All payments from an annuity or drawdown, and 75% of the amount of any UFPLS, are taxable as income.
From April 2016, these freedoms will be extended to existing annuity holders.
Currently, it is only possible to pass a pension on as a tax-free lump sum if the member dies before the age of 75 and has not taken any tax-free cash or income from their pension. If they have taken tax-free cash or income, the pension is subject to a 55% tax charge.
However, from April 2015, employees in defined contribution pension scheme will be able to pass on the pension to their beneficiaries tax free, provided they keep the money in a pension. Should the beneficiary decide to make any withdrawals, they only have to pay income tax at their highest marginal rate if the original member dies after age 75.
Currently, childcare vouchers are exempt from income tax and NI contributions on up to £55 per week or £243 per month per employee.
However, from autumn 2015, childcare vouchers will be replaced by a tax-free childcare scheme that provides working families with 20% of their childcare costs, up to £1,200 for each child.
Employers can also offer a free or subsidised nursery place in the employer’s own or shared nursery as a tax- and NI-free benefit in kind.
Employer-provided interest-free or cheap loans that do not exceed £10,000 (to the individual employee) in total at any time during the year are not liable for tax or NICs.
It is common for employers to allow employees to use these for annual season tickets with the employer funding the purchase and recovering the loan monthly by deduction from an employee’s gross salary.
The government’s new loan for rental deposit scheme will operate in a similar way to this.
Bikes for work:
Through a bikes-for-work scheme, employees effectively ‘hire’ a bike for a set period, typically a year or two, paying for the hire by a deduction from gross salary via a salary sacrifice arrangement. At the end of the hire period, they have the opportunity to purchase the bike.
The tax and NIC relief on the portion of salary sacrificed means that the employee pays less for the bike than if this was purchased from net pay. If they do choose to purchase the bike and any equipment at the end of the hire period, the Fair Market Value can be declared as a benefit in kind with a P11D.
On average, employers can save 13.8% of the total value of the salary that employees sacrifice because of the consequent reductions in their NI contributions.
The benefit value of a company car scheme is calculated as the new price published by the manufacturer, plus value-added tax (VAT), delivery, number plates and any optional extras.
The employee is liable to pay tax on a percentage of the value decided by a car’s carbon dioxide (CO2 ) emissions.
The lower a car’s CO2 emissions, the less tax it will incur. Employees and employers can gain further advantages by offering company cars via a salary sacrifice arrangement. Most employers now put a CO2 cap on cars purchased to help maximise cost efficiencies.
Company car tax benefit-in-kind rates 2014–19: HM Revenue and Customs fuel type D (diesel cars) and A (all other cars)
|Vehicle CO2 g/km||2015-16 %BIK Rate||2016-17 %BIK Rate||2017-18 %BIK Rate||2018-19 %BIK Rate||2019-20 %BIK Rate|
|Petrol||Diesel||All fuels||All fuels||All fuels||All fuels|
Give as you earn/charitable giving:
This benefit allows employees to make tax-efficient payments to a charity of their choice. For a 20% taxpayer, it would cost £8 to make a £10 donation, and for a 40% taxpayer it would only cost £6 to make the same-sized donation. However, these are not NIC free.
Employers can usually receive corporation tax relief on premiums paid to staff and it is not considered a P11D benefit.
Employees can save on NI contributions if gym membership is offered via a salary sacrifice arrangement. If an employee is a basic-rate taxpayer, they can save up to 12% when paying for gym membership via salary sacrifice, but those in the higher-rate band will save only 2%.
This does not include employees that have access to an on-site gym on their employer’s premises, which is tax and NI free.
A tax exemption has been introduced on amounts of up to £500 paid by employers for medical treatment for staff who have been on long-term sick leave. It will apply to recommendations by the government’s Fit for Work service and extends to employer-arranged occupational health services.
If an employer provides its employees with one health screen and/or medical check-up per year, the cost of provision is exempt from tax and NICs as an employment-related benefit as long as the health screening is generally available to all employees and/or the medical check-up is generally available to all employees, or to all employees identified in a previous screening as needing a check-up.
Where the benefit does not qualify for these exemptions, employees could save up to 42% tax if health screening is offered through a salary sacrifice arrangement.
The employer will save on the 13.8% employer NI contributions, with the cost of the screening recovered via deduction from employees’ pay.
Employers can offer employees shares or share options in their organisation as part of a government-approved share scheme, which offer certain tax advantages. Approved schemes comprise: share incentive plans (Sips), sharesave schemes, company share option plans and enterprise management incentive schemes.
According to industry body IFS Proshare, sharesave schemes accounted for £240m in income tax relief, while NIC relief was estimated to be in the region of £190m during 2012–13.
Sips were estimated to have generated £140m in income tax relief and £110m in NIC relief.
The personal investment limits of sharesave schemes are £500 a month. Employees can save from £5 a month up to a maximum of £500.
At maturity, on either the three- or five-year anniversary from the scheme start date, a tax-free bonus is added to the accumulated savings. These are calculated on the following bonus rates, effective from 27 December 2014:
Bonus rate Annual equivalent rate
3 year: 0.00 x monthly payments 0.00%
5 year: 0.00 x monthly payments 0.00%
There is normally no tax liability when the employee purchases the shares. However, in the event of an early exercise of options within three years from the date of grant, the employee may be liable to pay income tax on the gain.
If an employee invests in a Sip and keeps their money there for five years, no tax or NICs will be payable when the employee acquires the shares.
The maximum value of shares an employee can acquire with tax advantages through Sips is set at £1,800 for partnership shares and £3,600 for free shares.
The government will provide an annual exemption from income tax on bonuses or equivalent payments on amounts up to £3,600 paid to employees of organisations that are indirectly employee owned. This is part of a package of government measures to provide an additional £25m to support employee ownership.
Shares can also be transferred into an individual savings account (Isa) as well as a pension tax free but this must be done within 90 days of maturity.
(Source: Ifs Proshare)
Employee savings are available on gadgets such as computers and tablets offered through a scheme such as this, which is slowly starting to come back into the workplace.
Employees can make NI savings of up to 12% for basic-rate and 2% for higher- and additional-rate taxpayers. Direct payments from salary can be spread over 12, 24 or 36 months. Payments from salary are interest free and there are no credit checks.
The P11D threshold:
From 6 April 2015, the £8,500 P11D earnings threshold, which can be used to report all tax-efficient benefits, will be removed.
Income tax rates:
- Personal allowance: £10,000 (basic), rising to £10,600 on 6 April 2015, £10,800 in April 2016 and £11,000 in 2017.
- 20% on annual earnings above the PAYE tax threshold and up to £31,785.
- 40% on annual earnings from £31,785 to £150,000. The threshold at which 40% tax becomes payable will increase by £315 in 2016–17, taking the higher-rate tax threshold to £42,700, and by a further £600 in 2017–18, taking the higher-rate tax threshold to £43,300.
- 45% on annual earnings above £150,000.
- Employees pay NICs if they earn more than £153 a week. The amount they pay is 12% of their weekly earmings above that limit, up to £805 a week. The rate drops to 2% of earnings above that amount.
- Employers pay Class 1A and 1B national insurance once a year on expenses and benefits they give to their employees. The rate for the tax year 2014–15 is 13.8%.
- Employers pay 13.8% on all earnings for employees over the £153-per-week threshold. There is a 3.4% rebate on earnings between the lower earnings limit of £111 per week and the upper accrual point of £770 per week in 2014–15.
Viewpoint: Business advantages to tax-efficient benefits
The use of tax-efficient benefits to reward employees is an obvious avenue for employers.
Business advantages include employee retention, increased morale and wellbeing and increasing an employer’s reputation.
This is something that the government appears to recognise and encourage. Most recently, in January, a new tax exemption was introduced to enable employers to fund medical treatment, up to £500 for each employee and tax year, to help an employee return to work, provided certain conditions are met.
Building an effective HR strategy should be be the first step before trying to achieve tax and national insurance contribution (NIC) savings. That way, the employee would receive the benefits that he or she actually wants. Where the benefit is exempt from tax and/or NICs, there is a saving.
Additional holiday or a simple ‘thank you’ are items that may not attract specific tax breaks but also cost the employer little, if anything, to provide. It can also contribute to a reward package that would suit an individual.
But what are some of the tax- and NIC-efficient benefits that are available and how can they be delivered?
There are many specific tax and NIC exemptions for particular benefits; some have to be provided to all employees but others do not.
It is therefore important to individually check the particular rules for each item. The most common items are listed as: pension provision, childcare, loans, car parking at or near work, work-related training, employer-provided bikes, health checks, mileage allowances, share plans and green cars.
Many of these arrangements can be part of a salary sacrifice offering, and are popular in helping employers give employees additional tangible benefits at little or no extra cost.
Susan Ball is head of employers advisory services at Crowe Clark Whitehill.