According to HMRC you don’t have to pay tax or NIC on a benefit provided to an employee if:
- it costs you £50 or less to provide (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person)
- it isn’t cash or a cash voucher
- it isn’t a reward for their work or performance
- it isn’t in the terms of their contract
Unfortunately, this generous offering does not apply to directors or other office holders or their family. Where the employer is a private company and the benefit is provided to an individual, who is a director or other office holder of the company (or a member of their family or household), the exemption is capped at a total cost of £300 in the tax year.
Even so, by keeping to the rules this does provide a useful tax-free benefit. For directors who pay income tax at higher rates, the £300 annual benefit is equivalent to a taxable income of £500.
It is worth noting the following points:
- One of the conditions that needs 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 amount.
- 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 1 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.
The following example published by HMRC may be pertinent as we approach the festive season:
Employer D provides each of its employees with a bottle of wine costing £25 at Christmas. However, as an alternative, it provides employees who do not drink alcohol with a £25 gift voucher for a national supermarket chain which they can exchange for an alternative non-alcoholic Christmas gift. Both the bottle of wine and the non-cash gift voucher can be covered by the exemption.
Food for thought?