How are Employee Benefits Taxed?
Employee benefits are a potentially attractive method by which businesses can remunerate their staff. There are numerous advantages for both employer and employee; it is possible for both to make a cash saving through the efficient use of benefits, while benefits received by the employee can frequently be of more use than the portion of their salary that they may be sacrificing. However, the tax treatment of benefits means that there may be little or no tax advantage to sacrificing salary in favour of these so-called ‘perks’.
Inland Revenue GuidanceThe Inland Revenue is verbose in its guidance on benefits; however, the tax treatment of these items hinges on one basic principle: employee benefits are considered as part of the overall financial remuneration of the employee for tax purposes. The methods by which the respective tax liabilities are calculated can be complex, and vary depending on the nature of the benefits in question.
In the first instance, it should be noted that not all benefits are taxable. In fact, the Inland Revenue lists eight groups of benefits that are taxable, and later lists specific exemptions. Broadly speaking, taxable benefits include: employee accommodation and all associated rates and utility bills; the provision of a vehicle to an employee, subject to some clarification depending on the nature of the use; petrol or other fuel for such a vehicle; gifts or below market price sale of business assets to an employee; the direct payment by a business of expenses incurred by an employee; the settlement of a company director’s income tax bill by the employer; scholarships given to the children of an employee; and “any other benefits or facilities of any kind”, with the exception of specifically exempt items.
An Example – Company CarsOn a very basic level, employers are obliged to pay Class 1A NICs in relation to benefits provided. The sum paid will depend on the valuation of the benefits in question. Similarly, the employee will be required to pay income tax on taxable benefits. As has been mentioned, the way in which the value is calculated differs from benefit to benefit. For example, if you have a company car, you would calculate the value of the benefit in the following way:
- Calculate the value of the car itself, and any “accessories”
- Deduct the value of any capital contribution you have made
- Multiply the remainder by the percentage stipulated by the DVLA for the car’s CO2 emissions. You should note at this point that the maximum value of a car for benefits tax purposes is £80,000
- Calculate the amount of time during which the car was not available for your use, and make the relevant percentage deduction.
As can be seen, these are relatively complex procedures, and vary depending on the nature of the benefit. As such, you should seek guidance from HMRC or your local tax office on the tax liabilities of the employee benefits that you receive.
It should be remembered that, while there are very few employee benefits that are tax exempt, there are ways in which the tax liabilities of benefits can be mitigated. Further information on this is available in other articles in this section.