Employment Benefits
In today’s world many directors and employees package contains both a salary and benefits. Benefits in kind are assessed on all directors and employees whose salary and benefits combined are £8,500 or more.
Remuneration by way of benefits is often attractive to employees, especially if they are paying the higher rate of income tax, because the benefit may either be tax free or subject to less tax.
A benefit that is not taxable is not automatically exempt from National Insurance Contributions (NICs).
Essentially two tests must be applied in determining the tax implications of any benefit:
- Is the benefit taxable?
- If the benefit is taxable, what is its taxable value?
All earnings of an office or employment are taxable. Where they are not in cash it becomes necessary to put a value on them. As a general rule unless the benefit can be converted into cash there is no taxable benefit. Where it is convertible into cash the taxable amount is the resale value. To prevent avoidance, additional legislation charges certain other benefits to tax. The detailed rules are complex. We can advise on structuring remuneration packages, including benefits, in a tax efficient way.
Reporting
An employer is required to complete form P11D on an annual basis advising what benefits have been provided to the directors / employees. Benefits which are treated as pay for NIC purposes must be included on the deductions working sheet column 1A ‘earnings on which employee’s contributions payable’. (This should not include benefits liable to Class 1A NIC). Comprehensive records should be kept in relation to all benefits and expenses payments.
National Insurance Contributions (NIC)
NIC relief is available on all the tax qualifying expenditure, however where the £8,000 is exceeded the whole of the excess is chargeable to Class 1A and thus payable by the employer. In general employees’ National Insurance (NIC) is not due on benefits except vouchers, stocks and shares, the discharge of an employee’s personal liability and benefits provided by way of ‘readily convertible’ assets.
Most benefits are subject to Class 1A NIC payable by the employer. As this amounts to 13.8% of the taxable value of the benefit, you always need to consider the tax efficiency of providing benefits.
