What are the Most Tax Efficient Employee Benefits?
The tax treatment of employee benefits has become harsher in recent years. Previously, benefits in kind such as a company car would have been given fairly favourable tax treatment, and were frequently subject to a less stringent tax liability than the ‘money’ part of a salary. Gradually, however, the tax schedule has been tightened up, and many employee benefits are now severely taxed.
It is important to remember that the vast majority of benefits are considered, for tax purposes, to be part of the overall remuneration of an employee – that is, they are treated in exactly the same way as a wage or salary. The Inland Revenue guidance gives details of certain groups of benefits that are taxed in this way, and these groups cover pretty much every individual employee benefit that you could imagine. However, there are exceptions for, and clarifications to individual benefits within these groups. Frequently, these are the benefits that will receive the most favourable tax treatment. Being aware of the tax treatment of these benefits is important for both employer and employee; employers will be able to establish a benefits scheme that incurs the minimum possible tax liability, while employees will be able to make informed choices when they are offered a flexible or voluntary benefits package.
Amongst the most useful exceptions are those relating to transport. While company cars are taxed heavily, company vans receive more favourable treatment. For example, if the employee has the use of the van only for work purposes and the purposes of travelling to and from work, then there is no taxable benefit at all. However, even if no such restriction on use is in place, the maximum potential taxable benefit will be £3,000. As such, where possible you may wish to consider the provision of a van, rather than a car, to an employee. There are other transport-related tax efficient benefits; for example, if you provide a bicycle for an employee to use to travel to and from work, there is no taxable benefit. This can be particularly useful for those businesses that are looking to reduce their carbon footprint.
Method of Payment
In certain circumstances, the way in which the benefit is organised will determine its tax treatment. For example, an employer can provide a mobile phone to an employee with no resultant taxable benefit – even if the employer also pays for private calls. However, in order to qualify for this tax treatment the bill must be paid directly by the employer; if the employee pays the bill and is then reimbursed, a tax liability will arise.
The range of benefits for which the tax treatment is favourable is extensive, and you should seek guidance on the treatment of any individual benefit as there are simply too many examples to list here. However, this fact should in itself encourage you to investigate further if you think that you are suffering an unnecessarily high tax liability as a result of your benefits. There are options available, and they are frequently relatively easy to implement.