Do you know the real tax cost of your benefits in kind?

There is a sting in the tail for companies that provide their directors or employees with taxable benefits as part of their remuneration package.

Obviously, the directors or employees who receive the benefits will pay additional income tax if the benefits provided are chargeable to tax. An example is for the use of a company car.

The cost of the benefits is generally a deduction for the employer and this would reduce the employer’s corporation tax bill. However, it also triggers an additional, employers’ Class 1A National Insurance liability.

The amount payable is 13.8% of total taxable benefits provided.

Although this extra National Insurance payment is itself tax deductible, there is still a net loss of cashflow for the company which needs to be considered when planning remuneration packages for directors and employees.

As we have posted previously on this site, one way that a company can trim this additional NIC charge is to negotiate the repayment of a taxable benefit from affected employees.

Why on earth would you consider this?

Why would an employee consider repaying all or part of the cash equivalent of their benefit in kind? Doesn’t this diminish the value of their perks?

Certainly, this is not a strategy that you would use for all benefits provided but there are some situations where there are real win-win outcomes for both the employer and the employee.

A prime example is fuel provided to employees or directors for the private use of their company car.

You would need to crunch the numbers but it may well pay the employee to pay back the cash cost of private petrol provided. By doing this they will avoid the car fuel benefit charge and reduce their income tax by more than the refund of the fuel costs.At a stroke this also reduces the employer’s Class 1A NIC charges.

6 July 2019 deadline for 2018-19

The deadline for employees to make refunds of these types of cost to their employers is 5 July 2019 for the tax year 2018-19.

If you are unsure if this would work for your company please call us today at THP Chartered Accountants, we can help you calculate if there would be an overall benefit to you if you were to adopt this idea. Whilst also providing a range of accountancy services to help the growth of your SME, from bookkeeping, payroll, tax planning and much more, with offices in  ChelmsfordCheamWansteadSaffron Walden and London City.

Join The Conversation
ICAEW
Member of the Legal Services Guild
Sign up for our Newsletter