Benefits in kind

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Tax efficient salary packages

All payments, whether in kind or cash, are a possible source for one form or another of tax. Anything that is officially deducted or taken, no matter what name it goes under, that is not a direct payment for goods or service, is a tax.

New legislation is constantly being introduced to prevent the avoidance of tax on payments or benefits. It is quickly becoming one of the most complex sections of the law that governs income and taxation.

From the 2001 tax year the taxation on benefits in kind has been greatly extended. In the Inland Revenues effort to tax the very air we breath they have made it much harder to provide salary packages to your employees that contain tax efficient elements.

Taxable / Non taxable

How do we know whether a benefit is taxable or not? In general terms, if there is a resalable value to the benefit, i.e. it can be converted into a cash equivalent, then the benefit is taxable. However, there are also recognised benefits that are not taxable.

Expenses are also classed as a benefit, however, as most reimbursed expenses that were 100% necessary for business purposes would be 'claimed back' by the employee the Inland Revenue has a dispensation scheme that allows these 'zero liability' benefits not to be declared.

Dispensations

A dispensation can be made by the Inland Revenue that allows agreed upon expenses not to be listed in the annual declaration of benefits. You would usually expect a dispensation to be granted for traveling and subsistence although it is not guaranteed, you used to be able to get a dispensation for entertainment but, in general, is not now given.

Dispensations are not automatically granted, they have to be applied for and, if granted, may not cover all the employees and expense areas that were applied for. They are reviewed from time to time and have to be kept up to date.

Reporting the payment of benefits

Every employee, who has received a taxable benefit, must have an 'Expenses and Benefits' form, known affectionately as a P11D, completed for them at the end of the tax year. The information from all your employees forms is then consolidated onto the employers version, 'Return of expenses and benefits - employers declaration' P11D(b) form. There are strict rules that govern the completion, distribution and subsequent payments and we would suggest that advise is taken.

Non taxable benefits

Benefit	Conditions
Meals	in a staff canteen
Car parking	that it be at or near the work place
Nursery places	in the workplace for employees' children only
Home computer	provided by employer with a value limit
Relocation X's	maximum of £8,000 a move
Mobile phone	a single phone per person, phone for the family are out
Retirement	paid into an approved pension

There are other non taxable benefits but these are the common one's

Taxable benefits

Benefit	Details
Company cars	Non taxable if never used for private use i.e. left at employers premises during non business hours. If used only once for private use then it becomes a taxable benefit. There is no reduction for older cars There is no reduction for high business mileage Reduction if employee makes a contribution to purchase The 2002-03 tax year rule changes were been made to encourage the use of more environmentally friendly modes of transport and journey lengths. Consequently an older company car with a high business mileage, which for the 2001 tax year would have been taxed at the lower end of the scale, will now be taxed at the higher end.
Fuel (car) provided for non business use, i.e. private use	If fuel is provided and a percentage is used for private use and the employee does not make a reimbursement of the value of that percentage then it is taxable. Even if the only private use is between home and work it is still a taxable benefit as the employees travel costs are being reduced. The 2003-04 tax year rule changes now base the tax charge for fuel on the company car rate percentage rate and will be charged against a yearly flat rate that will be announced each year.
Company vans	Non taxable if never used for private use (private use includes to and from home / work), from 6th April 2005 it can be taken home. If used only once for private use then it becomes a taxable benefit. The benefit value is a flat rate based on the vans age at the end of the tax year (either under or over 4 years old) and includes fuel. Double cab pickups with a carrying capacity of less than 1000kg are treated as cars.
Vouchers	Unless provided solely for the acquirement of a non taxable benefit
Telephones	Excluding a single mobile, all non business telephone bills paid by employer are taxable.
Medical insurance	The whole cost of the medical insurance is taxable.
Home use of company assets	Taxed over the year at 20% of asset's market value at time of first provision to an employee.
Cheap loans	When loan exceeds £5,000.
Accommodation	Unless job related.

These are just a few of the popular and many benefits that are either wholly or partly taxable.

National Insurance

Class 1A national insurance contributions (NICs) are paid by employers only. The benefits declared on the P11D must only cover a single tax year, the NIC's paid are at the rate set for the tax year for which the benefits have been declared.

Benefits that are easily converted into cash and employer paid personal debts have a Class 1  NIC charge (the type charged through the payroll) and PAYE tax.

Car and fuel benefit values

The benefit value of a car is calculated based on the list price when new plus and accessories less any payments by the employee towards the initial cost of the car. The next step is to work out the charge rate, this is a percentage based on the cars CO² emissions and fuel type and can vary from 9% to 35%, the more eco friendly the less the percentage rate. The value of the car benefit is the cost price as worked out in the first step multiplied by the charge percentage rate less any contributions made towards private use. The employee is taxed on the benefit value and the employer pays class 1A NIC's on the benefit value.

If fuel is provided by the employer for the employees private use and the employee does not reimburse the company the fuel becomes a taxable benefit. The charge is calculated by multiplying the flat rate fuel benefit charge by the percentage used to calculate the car benefit charge.

In some case it may be cheaper for the employee to pay for all fuel used and be reimbursed by the company using the Inland Revenue set fuel only mileage rates. In a lesser number of cases it may be cheaper for the company to reimburse an employee for using their own transport at the Inland Revenue set mileage rates.