Benefits in Kind including the new 'Trivial Benefits' rule
What are benefits in kind?
Benefits in kind are benefits which employees or directors receive from their employment but which are not included in their wages or salary. They are sometimes called 'perks' or 'fringe benefits'. A benefit in kind is not something that a director or employee contracts for or get reimbursed for by the company. It is something that the employer contracts for and deals with on your behalf.
A benefit in kind can be made in the form of free use of a company car or van, private medical insurance, a paid for holiday, golf club subscription or even a small gift or present.
Generally speaking, I would not advise most of my small owner managed business clients to use benefits in kind as a means of taking profits from their business. Benefit in kinds cause employer’s National Insurance to be payable at 13.8% on the value of the benefit in kind. In addition, the employee/directors must pay income tax, at either 20% (or 40% if they are a higher rate taxpayer). It is true that the business will save Corporation Tax (or income tax for a sole trader) on the costs at 20%. However, it is the payment of the 13.8% National Insurance that makes benefits in kind so expensive to the owner managed business.
Don’t reimburse yourself
Just to be clear, if you as a director / employee personally contract for something e.g. a new mobile contract, a computer, a golf subscription or a health scheme for you etc and the company then agrees to pays your personal bill (as a company expense) then this results in the payment being taxed as additional salary i.e. employee National Insurance at 11% is also due as well as the 13.8& employers National Insurance. We can always deduct the private payment from your director's current account and it then has no tax issues.
Therefore, always contract for any services or goods in the name of the company.
It is not too important who actually pays the bill, but who makes the contract. It is better to have payment made by the company but this is not always possible.
So, if you need to pay for a new laptop and don’t have the company credit card with you, then say “I’m buying [contracting for] this new laptop in the name of XYZ Limited”. Get the invoice in the name of the company. That is what is important.
It is not always possible to get an invoice for every purchase, but where you can make sure you always buy it in the name of the company and make sure you make the verbal contract in the name of the company.
An employer should report each benefit in kind on a Form P11D each year and pay any National Insurance. The employee then pays their income tax, either through their Tax Return or by an adjustment to their tax code.
From 6 April 2016, low-value benefits in kind will be exempt from income tax and NICs, subject to a cap of £50 per each benefit in kind. Multiple trivial benefits in kind can be provided to each employee, so long as each individual benefit (i.e. each cost transaction) is less than £50. This would permit, for example, a round of drinks each month end with the team. Strictly, the provision of free food or drinks to the employee, after work when there is no ‘work related’ activities can cause the amounts to be classed at benefit in kind.
The purpose of this legislation is to increase clarity, transparency, and simplicity for the employer while also providing a tax efficient way to motivate employees on small (benefit in kind) payments.
Under the rules to 5 April 2016, there was no minimum cost threshold for a benefit in kind having a tax charge or NIC liability. All benefits in kind, regardless of value, had to be reported by employers to HMRC.
While employers could apply to HMRC for agreement to exclude benefits in kind on the grounds that they are trivial, these arrangements are made on a discretionary basis and therefore lacked clarity and certainty for employers.
The Finance Bill 2016 introduced a statutory exemption for trivial benefits. An automatic exemption from income tax and NICs will apply provided that:
The benefit in kind is not cash or a cash-voucher;
The cost does not exceed £50; (if the individual benefit exceeds £50, the whole amount will become taxable as a benefit in kind, not just the excess over £50);
the employee is not entitled to the benefit as part of any contractual obligation;
the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties; and
It was given for a ‘non-work’ reason.
Examples of non-work reasons include:
Taking a group of employee out for a meal
Flowers on the death of a loved one
Gifts on the birth of a baby
The gift must be related to employee’s welfare and goodwill, and not in relation to their employment service or performance.
Therefore, a gift awarded in recognition of services provided in the course of employment, recognition of a job well done, or as part of a contractual obligation, will not be exempt and a charge to income tax and NICs may apply.
While there is no limit on the number of £50 or less benefits that can be received by an employee each tax year, trivial benefits provided to directors (or to members of their families) will be restricted to an annual cap of £300. This therefore allows a regular amount of £50, or less, to be spent on behalf of an individual employee without the aggregate amounts being due to income tax and National Insurance (via a P11D) at the end of the tax year.
The new measures have been introduced to reduce the burden for employers and HMRC on gaining agreement that a benefit is trivial, thereby reducing administrative costs and preventing generous gestures from turning into a tax liability for the employee.