Employers with an eye for cost saving often want to take advantage of any tax and NI contribution (NIC) breaks when they devise a remuneration package, but saving money on the salaries and wages bill is only part of the picture. It is important to remember that a benefit is only a benefit if the employee actually wants it.
Building an effective strategy may be the first step before trying to achieve tax and NICs savings. That way the employee receives benefits that he or she actually wants and, where the benefit is exempt from tax and/or National Insurance, there is a saving.
But, what are some of the tax- and NIC-efficient benefits that are available and how can they be delivered? The most common items are listed below.
An employer-provided pension can be a significant benefit. Employers can make contributions to occupational or personal pension plans without triggering a tax charge (providing they are within the annual or lifetime limit). This can significantly enhance an employee’s remuneration package and is a tax-efficient way of rewarding employees.
In addition employers can allow employees to convert their own contributions into employer contributions by use of a salary sacrifice. Thus saving NIC and obtain higher-rate tax relief in many cases earlier.
Employers can currently provide employed parents with vouchers to fund approved childcare or can pay for the childcare directly to a maximum cost of £55 per week, free of tax and NICs. Any recipients who joined after 6 April 2011 have their tax relief restricted. For 20% taxpayers this should mean no change, but for 40% and 45% taxpayers, employers will be expected to gauge their marginal tax rate for the year ahead and restrict relief accordingly.
Employers can also offer a free or subsidised nursery place in the employer’s own or shared nursery as a tax- and NICs-free benefit in kind, with no £55 limit.
The NICs position follows the tax for both old and new recipients.
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 to tax or NIC.
It is common for employers to allow employees to use these for annual season tickets by the employer funding the purchase and recovering the loan monthly by deduction from salary.
Larger loans can possibly also escape tax if they are used to invest into new “close” company employer shares.
Car parking at or near work
Car parking, whether reimbursed to the employee after the event or purchased in advance by the employer “at or near the normal place of work” is exempt of tax and NICs.
Unfortunately, this relief does not extend to parking at the railway station for example in order to commute by public transport, although in some cases HMRC might accept the park and ride if the cost paid is for the parking.
The legislation is written so that employees can enjoy the use of an employer-provided bicycle free of tax and NICs if they meet certain conditions. Cycle to work schemes are promoted by many providers. In effect employees under these arrangements generally “hire” a bike for a year or two, paying for the hire by a deduction from gross salary under a salary sacrifice arrangement and then, at the end of the period, they then have the opportunity to buy the bike from the employer/provider for a minimal figure.
The tax and NICs reliefs on the hire charge apply where the bike is used for a “qualifying journey” (i.e. home to work place) mean that the employee pays less than the bike would have cost if purchased from net pay, but the employer remains in funds because the salary sacrifice or hire charge covered this outlay.
If an employer provides its employees with one health screening and/or medical check-up per year, the cost of provision is exempt from tax/NIC 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.
Not all employees have to take up the option to undergo health screening and/or a medical check-up, but all employees must have the opportunity to do so. There is no requirement that all employees should receive the same screening and/or check-up, or that the screening/check-up should be made available at the same intervals for all employees.
“Health screening” refers to an assessment to identify employees who might be at risk of ill health. “Medical check-up” refers to a physical examination of an employee by a health care professional.
Most recently, a new tax exemption was introduced that enables an employer to fund medical treatment, up to £500 per employee per tax year, to help an employee return to work provided certain conditions are satisfied.
There are many specific tax and NICs exemptions in respect of particular benefits, and 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.
Additional holiday instead of salary or a simple “thank you” are all items that may not attract specific tax breaks but cost the employer little, if anything, to provide.