Employee Remuneration

Benefits in Kind

The days when many directors and employees simply receive a pay packet are long gone. Today, most remuneration packages will consist of salary plus a variety of benefits selected by the employee from a "menu". The tax treatment and hence cost of each of these benefits will be a significant consideration when making a choice.

Taxable benefits include the private use of cars; the private use of vans (unless private use is limited to ordinary commuting to and from work); the provision of private fuel; the settlement of personal bills; the provision of living accommodation (unless job related); the provision of private medical insurance; and the provisions of vouchers and credit tokens.

Non taxable benefits include retirement benefits that are paid by an employer into an approved pension scheme; meals provided in a staff canteen; drinks and light refreshments at work; parking at or near the place of work; workplace nursery places and, since April 2006, certain other employer-supported childcare up to £55 per week; in-house sports facilities; payments for household costs incurred by an employee while working from home; removal and relocation expenses up to £8,000 per move;the provision of a mobile phone or vouchers for a mobile phone, which is limited to one phone per employee; the cost of staff Christmas parties or any other functions provided the total costs of all events in a tax year is less than £150 per head; and the provision of cheap or interest free loans of not more than £5,000.

Where benefits are taxable it becomes necessary to place a value on them. In many instances the value will be the cost to the employer but in some cases, such as cars, vans and the private use of business assets, the rules are complex and professional advice is required to handle the situation correctly.

Taxable benefits, although chargeable to income tax, do not generally give rise to a charge to employee's national insurance. Exceptions to this general rule include vouchers, stocks and shares, the discharge of an employee's personal liability, and benefits provided as 'readily convertible' assets. Virtually all benefits in kind are subject to Class 1A national insurance which is payable by the employer at a rate of 12.8 per cent of the taxable value of the benefit.

The administrative burden on employers is also significant. They are required to notify HM Revenue & Customs (HMRC) of the benefits provided to directors and employees by completing annual P11D forms. There are penalties if the forms are submitted late or are incorrect. The full amount of any benefit or reimbursed expense must be reported on this form. However, where the reimbursed amounts represent genuine business expenses a claim can be submitted by the taxpayer on his or her tax return (or in writing to HMRC if they do not receive a tax return) – this results in a zero liability.

Dispensations can be sought to allow certain expenses to be omitted from the P11d. These are commonly granted on costs related to travelling, subsistence expenses and routine entertaining paid out wholly, exclusively and necessarily for the business. Such dispensations are not granted automatically and will need to be renewed periodically.

To attract and retain the best employees, employers need to offer a competitive, flexible and tax efficient remunerations package. By taking professional advice this can be done whilst still complying with the rules set out by HMRC.