Most types of bonuses that businesses offer their employees will come with a tax liability. Cash bonuses are added to an employeeโs other earnings and will be liable for Income Tax if they take the personโs total earnings above the ยฃ12,570 personal allowance threshold. Some bonuses are given as benefits in kind, and these will also have tax implications for the recipient. Andrew McGain, Partner at Monetta outlines some of the strategies through which businesses can give their employees tax-free bonuses.
The key is to focus on tax efficiency when you make decisions about bonuses. These can help to make sure that you donโt overpay, and retain as much of the value within your business as possible.
If the bonus takes the employeeโs earnings into a higher tax bracket, it may be worth significantly less than it costs the business. In these cases, many company directors wonder whether there is a better way for them to provide bonuses to their employees – and ask whether there are options for tax-free gifts that can help employees enjoy the full value of their bonuses.
Tax-free bonuses with the trivial benefits exemption
One of the key ways that companies can give their employees a tax-free bonus is through the UKโs trivial benefits exemption. This only applies in specific circumstances that are important to take into account, but it means that it is possible to provide a bonus to employees without them (or you) incurring any additional tax burden.
The trivial benefits exemption applies to any voucher that meets all of the necessary criteria as outlined below. An eligible voucher will not be:
- Worth more than ยฃ50
- A contractual entitlement for the employee receiving it
- Exchangeable for cash
- Provided as an incentive or reward for meeting targets or general good performance
A voucher that meets all of these requirements qualifies as a trivial benefit and will not be liable for any taxes. You can give employees an unlimited number of these trivial benefits each year. This means that, as long as each voucher is worth ยฃ50 or less, it will not be liable for any taxes. While there is no annual limit on their value, you cannot give more than ยฃ50 per individual per day. It is important to plan your bonuses carefully to ensure you meet all the relevant requirements for legal compliance.
While you cannot offer these vouchers in recognition of an employeeโs service, this does not mean that vouchers must be given out equally. In fact, trivial benefits are discretionary – you can give a bonus to an individual employee, or to everyone within your organisation
It is not just employees that can receive vouchers in this way. Company directors can also receive trivial benefits, although only the first ยฃ300-worth of trivial benefits will be tax free in these cases. This restriction also applies to any members of a directorโs family or household.
Employees will not need to pay any taxes on these benefits, and they represent tax-deductible expenses for the business, making this a win-win situation for many businesses.
Benefits in kind as a tax-free bonus
For UK tax purposes, benefits in kind are any items of value that are not included in an employee’s salary but are provided in addition to it. Common examples include private medical insurance, childcare services, and travel expenses or company cars that are not exclusively to be used for business purposes.
While it is impossible to offer benefits in kind that are completely tax-free, there are options available to minimise the tax liability of this type of bonus, especially when it comes to company cars.
If a company car is used in a private capacity, it will be considered a benefit in kind for tax purposes and will therefore incur a significant income tax liability. This is calculated as a percentage of the list price of the car when it was new, with the percentage determined by the carโs CO2 emissions, and can represent a sizeable cost for employees. The tax rate reaches a maximum of 37% of the carโs original value for the highest-polluting petrol vehicles.
Electric cars are a very tax-efficient benefit
For this reason, choosing an electric vehicle is by far the most tax-efficient option. Considering a fully electric car as a benefit in kind, the rate of tax payable may be 2% of the carโs value, compared with up to 37% for a petrol car.
Offering electric company cars can also have tax benefits for the company. Fully electric cars that are purchased new and used by a business qualify for a 100% first-year allowance, meaning that the company can enjoy the full cost of the car as a tax relief in the year of its purchase.
National Insurance is payable for benefits in kind
Finally, businesses must pay a 13.8% National Insurance charge on the total benefits in kind they supply. By switching to electric vehicles, the business will reduce the overall value of its benefits in kind, and thereby reduce the amount it needs to pay in National Insurance tax.
Many businesses miss opportunities to save on taxes, by failing to identify options like tax-free bonuses, allowances and reliefs that are available. Working with an expert tax advisor or accountant can help you to plan your taxes efficiently and effectively, which will allow you to minimise your liability and enjoy more of the value of your business.
See also our otherย articles about bonuses.
