When considering an employee’s remuneration package, benefits in addition to a basic salary are often also offered. It is also common for employers to want to provide their employees with gifts or perks during the year.
The general rule is that benefits received are taxed on the employee based on the cash equivalent of the benefit received less any amounts made good to the employer; however, some benefits are exempt from tax.
Some examples of tax-free benefits include:
- Pension contributions paid by the employer into a registered pension scheme for the employee.
- Free or subsidised meals in an employer’s canteen provided that they are offered to all employees.
- Annual events such as a staff Christmas party but capped at a maximum of £150 per individual attending. There is no limit on the number of annual events held provided the total cost does not exceed £150 per head. For example, if there are three events held at a cost of £75, £80 and £60 per head each, the latter two can be claimed as exempt but the first event will be taxable in full (it is not possible to just tax the excess over £150).
- Long service awards for employments of 20 years or more and up to a maximum of £50 per year of service. Further tax-free awards can only be provided if a minimum of 10 years later.
- Provision of bicycles and/or safety equipment used in a ‘cycle to work’ scheme. Again, this must be offered to all employees and the employee must use the bicycle in qualifying journeys such as from home to work.
- Training costs and professional subscriptions.
Trivial benefits are also exempt from tax where all of the following conditions are met:
- the cost of providing the benefit must not exceed £50;
- the benefit cannot be cash or a cash voucher (but high street vouchers are fine);
- the employee should not be entitled to the benefit contractually (including salary sacrifice); and
- the benefit must not be in recognition of services performed by the employee as part of their employment.
If all of the above conditions are satisfied, the benefit will not count towards an employee’s taxable income and does not need to be reported on a P11D. If the benefit exceeds £50, the whole amount is taxed, not just the excess.
Interaction with other exemptions
The guidance states that where there is more than one potential exemption, the outcome most favourable to the employee should be applied. Any staff entertaining events below £50 per head could therefore be treated under the trivial benefits exemption and any larger events may qualify under the £150 annual parties and functions exemption.
Annual cap for directors
Directors of close companies (broadly a company with five or less shareholders or where all of the shareholders are also directors) can receive benefits totalling a maximum of £300 in any given year. This can be made up of multiple benefits providing each is below £50.
For example, if the director has received £270 of trivial benefits during the year and then receives a £50 high street voucher, this benefit would not be exempt. However, if before the year end they then received a £30 bottle of wine this could be treated as trivial and take their benefit up to £300. If gifts are made to family members of the director (who are not employees or directors of the company) then any trivial gifts provided would count towards the directors £300 limit.
Rather generously, there is no similar cap for other employees, and they can receive any number of trivial benefits during the year.
Trivial or not?
Some of the more common benefits have been set out below and circumstances where they may or may not qualify as a trivial benefit.
||Not a trivial benefit
|High street voucher worth £50 or less for a non-work related event e.g. Christmas, new baby, marriage etc.
||Gift voucher of any value provided to employees for meeting certain performance targets or ‘employee of the month’ etc.
|Meal provided by the employer to celebrate birthdays or other events (e.g. summer party) where the average cost per head is less than £50.
||Gift provided at Christmas where it is possible to determine the cost per individual e.g. bottles of wines provided to the directors at a cost of £60 each but to other employees at £15 per head, only the latter would be exempt.
|Turkey/wine/chocolate provided at Christmas provided the cost does not exceed £50 per individual (or less than £50 average cost per head if it is not practically reasonable to split).
||Taxi provided from work to home after working late (but may qualify under the late-night taxi exemption).
||Christmas party at a cost of greater than £50 per head (but may qualify under the annual parties and functions exemption).
As always, with tax, there are certain conditions to be met in order for the benefit to qualify as tax-exempt. We would recommend advice is sought prior to providing such benefits to avoid a surprise tax and NI bill for the company and its employees.