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What do companies need to know about giving employees benefits?

Staffing Stream

What do companies need to know about giving employees benefits?

Andrew McGain
| July 11, 2024
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Document with title employee benefits.

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Among the most important considerations for businesses intending to offer their employees benefits are the tax liabilities they will incur. Any cash bonuses will contribute to an employee’s overall annual earnings, which means that they may be liable for income tax at the employee’s usual rate — or, in some cases, at a higher rate.

Every UK employee is given a £12,570 personal allowance each year that is completely tax free. From there, any salary they earn above this limit is taxed at 20%. Any earnings above £50,270 are taxed at the higher rate of 40%. As such, an employee with an annual salary of £25,000 who receives a £5,000 bonus would pay tax on their bonus at a rate of 20% — representing £1,000 of the value of the bonus. An employee earning £50,000 who receives a £5,000 bonus would pay a 40% tax on most of the value of the bonus, representing a tax liability of £1,891.

Some businesses may also offer non-cash bonuses or benefits to employees, such as private medical insurance, company cars or free childcare services. In most cases, these bonuses will also incur a tax liability, as they will be considered benefits in kind. The rate at which these taxes are calculated depends on the nature of the benefit in question, but usually represents a percentage of its value. Businesses will also owe a 13.8% National Insurance contribution on the total value of the benefits in kind they provide, which means that it is important to consider tax efficiency and tax planning before awarding any benefits of this nature.

Can Businesses Offer Tax-Free Benefits?

A business can offer tax-free bonuses to employees, but only in very specific circumstances. One example is the “trivial benefits” exemption, which allows employers to provide vouchers that are tax-deductible expenses and which do not incur a tax liability for employees.

Several essential criteria must be met in order for a business to provide these vouchers without incurring taxes:

  • The voucher must be worth no more than £50.
  • It cannot be given as a contractual entitlement.
  • You cannot give the voucher as a reward or incentive for performance.
  • It must not be possible for the employee to exchange the voucher for cash.

If all of the above apply, a voucher may be exempt from taxes as a trivial benefit.

There are several advantages to this approach. Trivial benefits are discretionary, meaning that you can give them to a single person, multiple employees, or even company directors. You cannot give more than £50 in vouchers per day, but there is no limit to how many vouchers you can give to employees. Company directors (and members of their household or family) can receive up to £300 in tax-exempt vouchers per year.

You should speak to an expert tax advisor or accountant for guidance on fulfilling your obligations in these cases, as there can be serious penalties for noncompliance. However, by meeting all of the relevant requirements, you can offer tax-free gifts to your employees as often as you like.

Are There Tax-Efficient Bonuses for Companies to Offer?

With careful tax planning, businesses can sometimes make their own tax savings thanks to the bonuses they offer to employees. For example, if your company offers employees company cars as benefits in kind, there may be an opportunity to reduce your tax burden by switching to electric vehicles.

Fully electric cars offer tax savings for both employees and employers. Company cars that are also used for personal trips are considered benefits in kind, and the tax that applies is based on both the value of the vehicle and its rate of carbon emissions. The tax rate for a fully electric vehicle may be as low as 2% — compared with a petrol vehicle, on which the tax rate may be as high as 37% of the vehicle’s value.

The strategies listed here are only examples of ways that businesses may be able to provide bonuses to members of staff while maintaining maximum tax efficiency. Speak to an expert tax advisor for guidance on the most suitable approaches for your company and ensure you take the necessary steps to minimize your tax liability.