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Tax Free Benefits for Employees in the UK

tax free benefits for employees

Providing tax-free benefits to employees can be an effective way for companies in the UK to enhance their compensation packages. Certain benefits are exempt from income tax and National Insurance contributions for employees. Offering these tax breaks allows employers to provide additional value to staff at minimal cost.

In this article, we’ll explore some of the most common tax-free benefits for employees in the UK and how companies can leverage them as part of their rewards strategy.

Cycle to Work Scheme

One of the most popular tax-free benefits offered by UK employers is the Cycle to Work scheme. This government-backed initiative allows employees to obtain tax-free bike and cycling equipment up to the value of £1,000. The payments are taken directly from the employee’s gross salary over an agreed period (usually 12-18 months). The employee saves on income tax and National Insurance contributions, while the employer benefits from reduced National Insurance contributions too. Companies simply need to set up the scheme through an approved provider.

With cycling growing in popularity for commuting and improving health, the Cycle to Work programme provides a great incentive for employees. It allows staff to spread the cost of buying a bike and save over 30% compared to paying out of their net salary. Employers can boost green credentials and support a healthier workforce too. It’s a win-win for both parties, made possible by the tax breaks available.

Childcare Vouchers

Working parents know how expensive childcare can be. So childcare vouchers are another sought-after employee benefit. These vouchers, up to the value of £55 per week, are exempt from tax and National Insurance contributions. That means working parents can save up to £933 per parent annually on the cost of things like nursery fees and childminders.

The childcare voucher scheme is open to working parents of children under 16 (or under 17 if disabled). Employers simply need to set up a contract with an agency approved by HMRC. The savings for employees and reduced National Insurance contributions for employers make childcare vouchers a valuable staff perk for companies wanting to support working parents.

Company Cars

Providing employees with company cars is a common benefit. While employees do pay tax on the benefit-in-kind of having private use of a company car, employers can limit these taxes by providing electric and hybrid vehicles. Cars with ultra-low emissions (below 75g/km of CO2) incur very low tax rates. Hybrid models, for example, carry a benefit-in-kind tax rate of just 2% in 2022/23.

Choosing low-emission company cars allows firms to provide the motoring perk to employees while reducing tax burdens. Staff can also save significantly on the costs of leasing, insuring and fuelling an electric car themselves. So the company car remains an attractive benefit made more tax efficient through eco-friendly vehicles.

Workplace Nurseries

On-site nurseries are highly valued by working parents. The provision of workplace nurseries allows employees to benefit from tax breaks on childcare costs. Additionally, the employer can claim tax relief on the running costs of the nursery.

If contracts with the nursery are structured correctly, working parents can save thousands annually compared to paying for private nurseries out of taxed income. Employers also avoid National Insurance contributions on the childcare benefits provided. A workplace nursery signals to staff that the company values their parenting responsibilities. The tax advantages for both parties make workplace nurseries a win-win.

Company Share Schemes

Share schemes and share incentives allow companies to provide shares or share options to employees as a benefit. Various approved HMRC schemes exist, providing tax advantages for employers and employees.

For example, companies can allocate up to £3,600 of shares to employees tax-free each year under HMRC’s Share Incentive Plan. And the Enterprise Management Incentive scheme allows companies to provide share options with tax benefits on gains. Employees can then buy shares at a discounted rate and benefit from tax-free growth.

Using share schemes helps companies attract and retain talent while providing favourable tax treatment for staff too. The various HMRC-approved programmes available mean firms can choose the right one for their objectives and budget.

Social Events

Occasional staff parties and social events up to the value of £150 per head are exempt from tax for employees. Companies can organise and cover the costs of social gatherings, Christmas parties or summer barbeques without staff incurring benefit-in-kind charges.

Social events help bring teams together and boost morale. Keeping the costs below £150 per person allows employers to provide these bonding experiences tax-free. Getting teams together informally helps build relationships and foster a positive working culture. And employees get to enjoy great nights out without any tax downsides.

Health Screenings

Providing workplace health screenings, medical check-ups and health assessments can benefit employee wellbeing. Good employee health has been linked to increased productivity and fewer absences. These types of medical tests and health programmes may also be offered as a tax-free employee benefit when structured appropriately by employers.

Health screenings that are directly relevant to an employee’s role do not attract any tax charges. More general health check-ups and programmes can also be provided tax-free if made available through third parties like medical providers. Employers should take care to arrange health screenings and medical assessments correctly to avoid any unnecessary tax charges.

Professional Subscriptions

In many industries, employees need to maintain membership in professional bodies and organisations. Paying for these annual subscriptions and fees can represent a significant expense for staff. Employers have the opportunity to cover these costs as a tax-free benefit.

Where membership fees are entirely relevant to the employee’s role, companies can provide this as a tax-free benefit. Even splitting the cost of subscriptions 50/50 with employees allows firms to help reduce the burden. This may relate to bodies like the Law Society for solicitors or the British Medical Association for doctors. Checking the specific rules allows employers to provide this benefit tax-free where applicable.

Travel Costs

Travel Costs

Public transport and shared rides to work provided by employers can be free from tax too. Bus, metro, rail, ferry, aeroplane and bicycle travel are exempt when they qualify as a work journey. Transport organised and paid for by the employer directly to and from work is generally tax-free for employees as part of the rules around travelling for business.

This allows companies the opportunity to arrange tax-free travel solutions for staff commuting long distances. Season tickets for priority seating and arrangements with shuttle companies are options. Going tax-free on travel is great for the environment while easing the burden on employees too.

Training & Development

Job-related training courses funded by the employer represent another tax-free benefit for staff. As long as the training is specifically linked to an employee’s role and enhances their ability to perform, companies can cover the costs without taxable consequences. The training must be a requirement of the job.

Paying for employees to achieve job-relevant qualifications and certifications without hitting their net income is attractive. It encourages career development and allows staff to expand their skills. Employers also benefit from a more qualified workforce. So job-specific training courses make for a mutually beneficial tax-free perk.

Pension Contributions

Making contributions to employee pensions is another way employers can provide benefits tax-efficiently. Pension contributions made by both employer and employee attract tax relief at the employee’s marginal rate. So higher rate taxpayers can save 40% on pension contributions made via salary sacrifice.

Employers can structure pension plans to take advantage of these tax breaks. Making the maximum allowable contributions means helping staff build up retirement savings while reducing tax burdens. This perk is especially valued by older employees thinking about their long-term future.

Some additional options like private medical insurance can also be structured as a tax-efficient benefit through salary sacrifice arrangements. Employers should consult with benefits advisers to ensure pension plans and other benefits comply with HMRC requirements. But used properly, pension contributions offer a key way to enhance remuneration packages tax-efficiently.

Work Equipment

Providing employees with the work equipment they need to perform their duties does not attract any tax charges. Items like laptops, tablets, mobile phones, specialist tools and protective clothing can be given tax-free by employers when used entirely for business activities.

Even if employees use work mobiles or laptops a small amount privately, Her Majesty’s Revenue and Customs (HMRC) does not levy a benefit-in-kind tax charge. Keeping equipment on company premises when not being used for work is advisable to avoid any grey areas around personal use. Issuing clear work equipment policies helps employers provide these essential tools tax-free.

Parking Spaces

Offering parking spaces to staff is a popular perk, especially in congested city centres. While everyday commuter parking spaces would be taxable, certain exemptions exist that allow employers to provide parking tax-free.

Spaces used entirely for business purposes, such as for company fleet vehicles, do not attract tax charges. Additionally, parking spaces provided for business meetings rather than an individual’s routine commute can be tax-free. Employers should carefully designate parking spaces for business use only to avoid unnecessary tax bills. This allows staff who drive for work in convenient places to leave vehicles.

Mileage Allowances

Reimbursing employees for using their cars for business travel represents another tax-free perk. Approved mileage allowance payments up to Her Majesty’s Revenue and Customs (HMRC) non-taxable rates can be made to staff. This covers the costs of fuel, insurance, maintenance and other motoring expenses.

HMRC sets industry-standard mileage rates that employers can reimburse without tax consequences. Paying up to 45p per mile for the first 10,000 miles driven is the current approved amount. Ensuring claims follow HMRC guidance means employers can provide this job-related travel allowance tax-free. It provides help to employees using personal cars for business.

Eye Tests & Glasses

Employers can pay for employee eye tests and prescribed glasses tax-free in certain circumstances. Where vision correction is required specifically for using computers and other screens as part of an employee’s work, employers can cover eye tests and spectacles up to £100 per employee.

Eye care related to working with visual display screens is eligible for tax relief due to health and safety requirements. Employers should arrange eye tests through an optician and reimburse costs upon receipt of an invoice. Keeping within the £100 limit allows employers to offer this well-being benefit tax-free for suitable employees.

Professional Advice

Seeking professional, legal and financial advice can be expensive for individuals. As a benefit, employers may cover the costs of certain professional services used by employees. Help with tax returns, mortgage advice, legal services and confidential counselling can be provided tax-free in some cases.

Where the advice is closely related to employment, covers residual matters around termination or relates to legal requirements, employers can often pay for these services tax-free. However, care must be taken around personal advice versus employment-related assistance. Overall, professional advice given in the right circumstances represents a valuable tax-free benefit.

Summary

In summary, employers in the UK can leverage various tax exemptions and approved schemes to provide benefits to staff tax-efficiently. Offering a range of tax-free benefits helps companies enhance their employment packages and support employees’ financial well-being. Structure and compliance are important, but the tax advantages for both employers and staff make these perks worth exploring.

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