It is important to note however, that a benefit is only a benefit if the employee actually wants it. Many employers allow the employee to tailor his or her remuneration package by giving up salary in return for a benefit. That way the employee receives benefits that he or she actually wants and, where the benefit is exempt from tax and National Insurance, saves the tax and National Insurance that would have been paid had the employee taken the salary and funded the benefit from his or her post tax and National Insurance salary.
However, salary sacrifice schemes are not without complication. To be effective, the employee must give up the higher salary for good in exchange for the benefit. If the employee has the right to revert back to the higher salary at will, HMRC will tax the employee as if the higher salary had been received. Where using salary sacrifice schemes to take advantage of exempt benefits, it is important therefore that the documentation is watertight and makes it clear that the switch from a higher salary to a lower salary plus benefits is a permanent one.
There are a wide range of exempt benefits that can be used to form part of a tax efficient remuneration package. Some of the more popular ones are considered below.
The high cost of childcare means that working parents are likely to value highly any help towards the costs. The provision of childcare vouchers is an effective way to take advantage of the exemptions on offer. Employees can be provided with childcare vouchers of up to £55 per week of care without triggering a tax liability.
If an employee gives up a salary of £2, 915 a year (£55 x 53 weeks) in exchange for childcare vouchers, the employee will save tax and National Insurance. The amount saved will depend on the employee’s personal circumstances. For example, if the employee pays tax at 22% and National Insurance at 11%, the employee will save tax of £641.30 and National Insurance of £320.65. Gross salary of £2915 would equate to a net salary of £1953.05. This means that an employee who takes the salary can `purchase’ childcare of £1935 from £2915 of salary whereas the employee who gives up the salary in exchange for vouchers receives the full £2915 of childcare. This is certainly a worthwhile swap.
The same principle can be applied to the provision of other exempt benefits, including exempt childcare provided by means of a workplace or commercial nursery or childminder. In all cases, the terms of the exemption must be met.
An employer-provided pension can be a significant benefit. Employers can make contributions to occupational or personal pension plans without triggering a tax charge. This can significantly enhance an employee’s remuneration package and is a tax efficient way of rewarding employees.
The system of statutory mileage allowances enables an employer to make tax-free mileage payments to employers. This can amount to quite a significant tax-free sum. The allowance can be paid in respect of cars (40p per mile for the first 10,000 business miles and 25p per mile thereafter), motor cycles (24p per mile) and cycles (20p per mile). If these sums are not exceeded there are no reporting requirements. If higher amounts are paid, the excess is taxable and if lower amounts are paid, the employee can claim tax relief on the shortfall.
The employer can also pay tax-free passenger payments of 5p per passenger, per mile, provided that the passenger is also an employee for whom the journey is a business journey. Again, any excess is taxable. However, the employee cannot claim relief if the employer does not make a passenger payment or pays an amount less than 5p per mile.
Other Transport, Travel and Subsistence Exemptions
Continuing the transport theme, there are a variety of other tax-free options available. The first of these is workplace parking. The employer can provide an employee with a parking space for a car, motorcycle or other cycle without giving rise to a tax charge. In city centre locations particularly, this can be a valuable benefit, predominantly for private purposes.
If an employee travels in the course of his or her work, the employer can pay a tax-free allowance of up to £5 per night in the UK, and £10 per night abroad to cover incidental expenses. If the employee travels a lot, this can add up.
Some exemptions require a greater capital outlay on the part of the employer. Within this category is the provision of a works transport service, whereby the employer provides a bus or minibus service to transport employees to and from work and the employee effectively enjoys tax-free home to work travel. This can generate significant savings for the employee. Employers without the resources to operate such a service can achieve a similar result by subsidising a public bus service.
Employers who are keen to encourage their employees to keep fit can provide cycles and cycling safety equipment tax-free.
Other more limited transport-related exemptions include travel and subsistence during public transport strikes and travel home as a result of late working or the failure of car sharing arrangements, as well as home to work travel and the provision of cars for the disabled
Education and Training
Education and training can be a significant benefit, reaping long-lasting rewards for the employee. Provided that certain conditions are met, the employer can provide work-related training and individual learning account training tax-free.
Perhaps more popular are the exemptions for recreational benefits. These include the ability of the employer to provide sporting or other recreation facilities tax-free provided that certain conditions are met. This would cover, for example, a workplace gym, provided that the facilities were not made available to members of the public generally.
Also within this category is the well-known exemption for annual parties and functions. The employer can provide functions to a total cost of £150 per head without creating a tax liability.
Entertainment provided by a third party is tax-free, as long as the employer has not procured its provision and it is not being provided in recognition or anticipation of services.
In the event that an employee moves house because of changes in his or her job, the exemption for removal benefits and expenses enables the employer to provide tax-free assistance to the tune of £8,000. As with all exemptions, certain conditions must be met.
In addition to the benefits outlined above, there are a number of benefits which can be provided to employees tax free and which can be used as part of a tax efficient remuneration strategy.
These include the provision of free or subsidised meals, use of a works bus service, meals provided to cyclists on cycle to work days, eye examinations, overseas medical treatment and a tax-free allowance to home-workers of £2 per week.
The provision of exemptions within the tax system allows employers to exploit these exemptions to reward employees in a tax efficient manner. The employee’s remuneration package can be tailored to include benefits of value to the employee.
In planning any remuneration strategy, the value of exempt benefits should not be overlooked.