A benefit in kind in the UK can be defined as all that one gets from his or her employer, other than in cash form and which bears value. Most benefits in kind are always taxable, which means that one would be obliged to pay tax on the value of such benefits. There are a number of tax-free benefits in kind that may be enjoyed both by the employee and the employer.
Tax-exempt benefits in kind - Now, let us just see what benefits in kind are and how it works.
What Are Benefits in Kind?
A benefit in kind is some benefit or advantage accruing to any person from an employer, whether in respect of employment or the profits of such employment arising in or from the employment over and above his regular compensation. Examples include company cars, medical insurance, and work lunch. On one hand, many benefits are taxable, while a whole raft of benefits is tax-exempt and, as such does not inflate your taxable income.
Tax-Free Benefits in Kind: Key Examples
Some benefits are completely tax-free; the result of this is that employees can receive some additional benefit in kind without them, or their employer, having to pay any more in extra tax. The key ones are as follows:
Workplace Parking
If your employer provides you with free or subsidised parking at, or near, your workplace then you don't have to pay any tax on it.
Example: Your employer gives you a place to park your car on its premises free of any charge. You pay no tax on the value of that car parking space.
Bicycles and Cycling Safety Equipment
Anything which can be described as, Cycle to Work Scheme, where bicycles and equipment relating to cycling safety are lent by the employer for journeys between their homes and workplaces shall be exempt from tax provided the bicycle is mainly used for journeys to and from work or work-related travel.
-Example: Your employer gives you a bicycle. You use the bicycle to go to work, other than sometimes at weekends. You will not be incurring any tax on the bike and/ or safety helmet value, provided that it is mainly used on business.
Childcare Vouchers (for those already in the scheme)
Childcare Voucher Scheme closed to new entrants in 2018, those already in the scheme can still get tax-free childcare vouchers up to a certain limit.
Example: You receive childcare vouchers from your employer by salary sacrifice and you receive £ 55 a week. Vouchers are tax-free, providing they stay within limits set for basic rate taxpayers.
Employer Pension Contributions
Employer contributions to a registered pension scheme are tax-free. In practice this means that employees can watch their retirement pot grow but will not see their taxable income rise.
- Example: Where your employer pays £200 a month into your pension, you pay no tax on these contributions.
Free Workplace Meals
Where an employer provides free or subsidised meals in a staff canteen available to all employees this is a tax-free benefit.
- Example: You are entitled to one free lunch every working day in the staff canteen. No tax would be payable on the cost of these meals.
Mobile Phones
One mobile phone and its line rental provided by employers to employees for business and private use are exempt from taxation.
- Example: Your employer gives you a mobile phone to be used for business but you can use it privately as well. You will not pay any amount of tax on the mobile phone and its line rental.
Eyesight Tests and Glasses for Computer Use
Where you are required to work with a Visual Display Unit (VDU) - for example a computer screen - your employer can provide you with free eye tests and spectacles to use with a VDU. You will not have to pay any tax on this benefit.
Example: You are given an eye test and computer glasses free from the employer. These are exempt from tax in so far as they are used for your work.
Work-Related Training Courses
This also is exempt in circumstances where an employer pays for training or development courses in respect of your employment.
- Example: Your employer pays for you to undergo a course to enable you to better perform your work duties. The value of that course or training will not be taxable in your hands.
Long Service Awards
If you are given an award because of long service this is tax-free up to £50 for each year of service provided that it does not come in the form of money.
- Example: Your employer gives you a watch for £1,250 after 25 years of service. You pay no tax on the value of the watch if it meets the long service awards conditions.
Christmas Parties and Social Functions
This means employers can spend such an amount as £150 per employee per year on some form of annual social event-for example, a Christmas party-without any tax charge arising, provided the event is available to all employees.
- Example: Your company puts on a Christmas party spending £120 per head. You pay no tax on the value of you attending the event because it's below the £150 limit.
Following is a list of some other exempt benefits;
- Mileage allowance payments up to the approved amount.
- Incidental overnight expenses are covered up to the allowable limit of £5 per night within the UK and £10 per night when abroad.
- Transportation home due to late working hours or the breakdown of car-sharing arrangements.
- Commuting in an emergency vehicle while on call.
- Recreational or sporting facilities you provide directly, such as a gym.
- Eligible removal expenses and benefits (up to a maximum of £8,000).
- Counselling and outplacement services.
- Medical treatment aimed at helping an employee return to work is exempt if you cover up to £500 in costs.
- Small gifts from third parties.
Above exemptions are available only if the related conditions are satisfied
Why Does the Government Give These Tax Exemptions?
Tax exemption extended by the UK government on certain benefits in kind are meant to encourage a set of social, health, and economic objectives. Benefits accorded under this scheme reward behavior that is put forward as beneficial to the community. Examples include:
Bicycles to travel to work: It's an environmentally-friendly mode of transportation.
Pension savings: It helps them save up for retirement.
- Employee welfare: Eye tests free and to keep them fit, encourage cycling .
By making such facilities tax-free the government ensures that for the employee, such perquisites are not extended to an increased tax burden and for the employer they can be used as a very good additional benefit to supplement salary packages .
Conclusion
In this case, benefits in kind that would not result in an increased income tax burden from the perspective of the employer would involve things like avenues of tax-free benefits. These range from minute ones, say, a bicycle to travel to work with, all the way to free meals at work or even a mobile phone that would ensure and increase work-life balance without necessarily raising one's taxable income.
Where there is any doubt as to whether any benefit received is taxable or exempt, often the best course is to check directly with employers or to take relevant professional tax advice in view of specific circumstances.
Legislative References:
- Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003): Comes under this act the legislation containing rules on how benefits in kind are to be taxed, along with allowable exemptions.
- Cycle to Work Scheme covered under Section 244 of ITEPA 2003.
- Employer's pension contributions - ITEPA 2003, Section 307; employee staff events, Section 264 of ITEPA 2003.
- Section 307 ITEPA 2003 Employer Pension Contributions. Section 264 ITEPA 2003 employee events, Christmas parties etc.