Options for reducing the impact of taxation on our earnings are somewhat limited. That said, there are still opportunities that will keep you the right side of the law and will increase the take home pay of employees.
One such opportunity available to employers is to pay so-called trivial benefits. The benefits may be of small value, but never-the-less, even small tax-free payments will be gratefully received.
To qualify as tax-free, the benefits paid to employees need to fit the following criteria:
they cost £50 or less to provide,
the payments are not made in cash or by the use of cash vouchers,
the benefits are not made as a reward for work or performance,
the provision of the benefits is not required in the terms of contracts of employment.
You don’t need to pay tax or National Insurance or advise HMRC that qualifying payments have been made, however, you will have to pay tax and possibly National Insurance on any benefits that don’t meet all these criteria.
Directors of smaller companies can also avail themselves of this benefit, but in their case, these payments would be limited to a maximum £300 in a tax year. This restriction also applies to members of the director’s family and household.
The benefits can also apply where the trivial benefit is provided on behalf of the employer by a third party. For example, where the benefit is provided through a management services company within a group of companies or by a third party business where management services have been outsourced, provided the cost of the benefit is ultimately borne by the employer.
Further clarification provided by HMRC regarding the payment of trivial benefits includes:
One of the conditions that has to be satisfied is that the cost of providing the benefit does not exceed £50. If the cost of providing the benefit exceeds £50, the full amount is taxable, not just the excess over £50.
In determining the cost of the benefit for the purposes of the exemption, as for benefits in kind more generally, use the VAT inclusive.
The cost of providing the benefit to each employee and not the overall cost to the employer determines whether the benefit can be treated as a trivial benefit. So, a benefit costing up to £50 per employee whether provided to one or more employees can be treated as trivial.
Usually it will be obvious what the cost of providing the benefit is. However, on occasions an employer will provide a benefit to a group of employees and it is impracticable to establish what the precise cost is per person. In such cases, when determining whether the monetary limit has been exceeded you should take the average cost per person of providing the benefit.
In determining whether the average cost method should be applied, you should apply common sense, bearing in mind the circumstances, in deciding whether it is appropriate.
As we approach the festive season the following example may shed some light on how this scheme would work in practice.
An employer provides each of its 100 employees with a turkey at Christmas and the total bill comes to £4,500. There are a variety of sizes. Because the employer has made a bulk order, the turkeys have not been priced up individually but would cost in the region of £40 to £60 each. Employees are able to choose which bird they have. Rather than undertake a detailed analysis of the individual benefits, HMRC advise that you should accept that the cost per head is £45, reflecting an average amount of £4,500/100. The benefit can be covered by the exemption since the cost for each employee does not exceed the trivial benefit financial limit.