Rewarding your employees tax efficiently

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Kelly Goodchild

From 6th April 2016 new guidance has been issued with regards to providing trivial benefits to employees.

In the past there has always been unwritten rules surrounding trivial benefits, however these types of benefits are now to be legislated and the new legislation is far more generous.

An employer is now able to provide their employees with benefits that are not in the form of cash or cash vouchers up to a maximum of £50 per benefit.  There is no cap on how many benefits can be provided during a tax year. Therefore an employer could, for example, give his employees a gift voucher for a supermarket chain during the summer for £50 and then give them all a turkey valued at £40 in December. Both of these would be treated as trivial and therefore tax free.

Caution needs to be taken however as these benefits cannot be given as part of the employees contractual obligation (including under salary sacrifice). Therefore, if the employee is entitled to the benefit, whether because of a clause in their employment contract or some other agreement, then the exemption does not apply and the benefit would need to be taxed under paye, regardless of how small the cost.

As an example, an employer runs a call centre and gives £25 gift vouchers to employees who hit specific performance targets each week. The gift vouchers are provided in recognition of the services provided and so the exemption cannot apply.  If however, the employer provides all of their staff with Christmas gifts to the value of £30 and the employees receive the gift each year regardless of their performance during the year, then these gifts are not provided in recognition of the employees’ services and are merely treated as a gesture of goodwill and subject to the other qualifying conditions being satisfied, the exemption can apply.

These types of gifts can also be provided to a director and other members of their family or household. In this case there is an additional clause that states that the total amount of benefits given in any one tax year cannot exceed £300.  Where the cost of an additional trivial benefit results in a total cost that exceeds the annual exempt amount, none of the benefit that exceeds the £300 is exempt and will therefore be taxable. However, the tax treatment of any earlier benefits where the total cost did not exceed the annual exempt amount is not affected.

One other tax free benefit that can be provided to employees and directors are long service awards.  Where an employee has been employed by the company or business for at least 20 years he/she can receive a long service award of up to £50 per year of service entirely tax free. Therefore for say 25 years of service a reward of £1,250 can be made. 

Again this reward cannot be cash or a cash voucher, or readily convertible assets such as shares in a different company or premium bonds.

One point to note is that under the terms of the exemption an award is only tax free if an award has not been made by the same employer in the previous 10 years. Therefore if an employee was given a long service award at 20 years and then again at 25 years, the one given at 25 years would not fall within the exemption and therefore be taxable.  If the employee was given an award at 20 years and again at 30 years, both of these would fall within the exemption and therefore as long as they were within the limits of £50 per year of service and would be tax free.

Where a long service award is more than the permitted £50 per year only the amount over will be taxable.  So for example for 20 years service an employee was given holiday vouchers of £1,500.  The first £1,000 would be covered by the exemption leaving the remaining £500 taxable.

In both cases of trivial benefits and long service awards, where a tax charge does arise, the employer may be able to meet the associated liability by means of a PAYE Settlement Agreement (PSA) so as to preserve the tax free nature of the gift in the hands of the employee.