A Guide to Benefits in the UK: Taxation

As we pointed out in the first part of this guide to benefits in the UK, the question of What benefits should I be offering to attract and retain employees?" is top of mind to many employers across the world. We teamed up with Ben, a UK-base benefits provider to give you the answer when it comes to the UK. In the first part of our guide, we talked about statutory benefits and the shift towards certain benefits and perks, since the onset of the pandemic. In the second part, we get into the nitty-gritty of how all these much-needed benefits are taxed. We add to that information on pre-existing allowances and tax breaks, as well as newly introduced ones due to Covid-19. (Read the third part of the guide).

How taxation of benefits works in the UK

When we talk about benefits, it's important to make a distinction between those which are simply a top-up of statutory benefits such as additional vacation days or extra parental leave and perks that have a monetary value. The former are not taxed any differently or additionally to regular income because additional leave doesn't increase the gross pay. Perks, also known as benefits in kind, on the other hand, represent extra taxable income and often require additional taxation. 

When they do, employees pay income tax on them, and they are indicated on the payslip. In most cases, the full or partial monetary value of the benefit in kind is "added" to the salary, and the total is taxed according to UK employment tax laws.

Employers need to present to HM Revenue & Customs (HMRC) a declaration with details of any benefits in kind given to each employee through the P11Db form, which lists the benefits and expenses eligible to pay the Class 1A National Insurance Contributions for the relevant tax year. The HMRC then calculates the Class 1A NIC contributions that the employer needs to bear on these amounts. 

If the employer doesn't include the benefit in kind in the employee’s payroll, the employee should tell HMRC about any benefits they or their family start or stop getting from work - even if their employer has already taken Income Tax and National Insurance for them.

You can read more about taxation of benefits in kind around the world here.

Existing tax breaks and allowances for benefits in the UK 

All that said, there are provisions for some benefits in kind to be either fully or partially exempt from tax. The HMRC treats the following benefits in kind as tax-free:

• contributions paid into an approved occupational or personal pension scheme 
• subsidised or free canteen meals, as long as they are provided for all employees
• in-house sports facilities
• counselling services to redundant employees
• certain childcare arrangements
• Organised transportation, or subsidies to public bus services
• Bicycles and cycling safety equipment as well as bicycle and motorcycle parking
• Up to £8,000 for relocation expenses if the employer is moving an employee
• Personal gifts for occasions unrelated to the job, such as retirement or wedding gifts
• Equipment and facilities for employees with disabilities 
• Christmas / annual parties (up to £150)
• Work-related training
• Health screening / medical check-up once a year
• Late-night taxis (up to 60 journeys in each tax year)

Beyond these tax breaks, a benefit in kind is considered 'trivial' and is not taxed if it's all the following:

• less than £50 in value
• not exchangeable for cash
• not a reward or bonus for doing well in the job
• not something stipulated in the employment contract
• not a 'salary sacrifice'.

There is no limit to the amount of total trivial benefits an employee could receive, excluding directors of closed companies - which is capped at £300 per year.

Remote work allowances and breaks

Since the onset of the Covid-19 pandemic, the UK government has made additional provisions for benefit allowances and breaks. They are the following:

1. Since 6th April employees can claim £6 per week for working from home expenses, which the employers can cover tax-free. If the employer covers any costs over that limit, they will need to prove that the payments are no more than the employee's additional household expenses. 
2. Any equipment, services, and supplies that employees receive from their employer is not subject to reporting or additional tax, as long as they are only using it for business purposes, and any private use is insignificant.
3. In case the employer is not covering the expenses for the home office equipment, the employee can receive tax relief, as long as it is "wholly, exclusively and necessarily in the performance of the duties of their employment."
4. If the employee needs a broadband internet connection to work from home but does not have one, the employer can reimburse the broadband fee tax-free. Private use of broadband must be limited.
5. The restriction on the use of work mobile phones for personal reasons has been lifted. One phone and SIM card per employee are allowed.

A note on Christmas 2020: While Christmas parties will most likely not be taking place this year, as the legislation currently is, there won't be a possibility for employers to repurpose the £150 as another tax-free benefit in kind related to Christmas. That's because the annual function exemption only applies if all employees are invited, and HMRC has not relaxed that requirement. What employers could do is utilise the "trivial" benefit in kind and provide something relating to Christmas that costs up to £50 in value.

Can UK employers cover the benefit in kind tax?

You may be wondering whether, beyond tax exemptions, there is a way to spare employees from having to sacrifice parts of their salary over receiving a benefit. While the tax will always need to be paid, there are ways that an employer can cover it.

It's through a mechanism called "gross-up." It's applied by taking the value of the benefit in kind, calculating the impact it will have on the net pay, and adding it to the salary of the employee to cover the difference.

To gross-up a benefit's amount, the employer would need to:

1. Calculate how much the net payment in the payslip would have been without the benefit
2. Recalculate the payslip, including the value of the benefit
3. Add the amount of tax the employee would be charged for the value of the benefit to their gross salary (i.e. by using a bonus wage-type). 

Conclusion

We hope this second instalment of the Boundless and Ben guide to UK benefits has further helped you in figuring out how to start creating or rethinking the package you offer to employees. In the third part of the guide, we provide you with the tools to build your bespoke benefits package with confidence, providing real-world examples from four companies. 

If you need to understand more of the UK's employment legislation, have a look at our comprehensive UK Country Guide. If you need help with employing UK-based workers legally and compliantly Boundless can help. If you want to create a personalised employee experience through benefits, Ben can help.