Tax treatment of benefits

A modern, flexible benefit plan provides a number of potential tax advantages to employees and employers. 

Employees

A flexible benefit plan allows employees to choose to swap some of their existing benefits or purchase benefits from a menu of options. Payments in excess of the employees spending allowance are normally collected via a gross salary adjustment.  If employees exchange salary for tax exempt benefits (pensions, life cover, childcare vouchers, mobile phones, etc.), they do not pay tax or National Insurance on the amount exchanged.  This gives a basic rate tax payer earning less than the National Insurance (NI) Upper Earnings Limit (UEL) a saving of 33% compared to receiving the money as salary.  For example, an employee that exchanges £200 per month of their salary for childcare vouchers and additional pension payments will save £792 in tax and NI compared to taking the money as salary. 

Even if the benefits are not tax exempt, employees can still exchange salary for employer provided benefits and, whilst they will be charged income tax, they save NI as their salaries have been reduced by the value of the benefit.  This gives employees earning under the UEL an 11% saving.

Employers

Employers particpating in a flexible benefit plan do not pay employer's NI on payments on payments to exempt benefits.  If these payments have been exchanged from salary by employees then the employer will save 12.8% employers NI on the amounts.  For example, an employee that exchanges £200 per month of their salary for childcare vouchers and additional pension payments will deliver an annual NI saving to the employer of £307. 

What are the issues to consider?

Any change to, or implementation of, new employee benefit plans need to be carefully considered. 

A new flexible benefit plan can mean changes to employees' employment contracts and salaries.  The Inland Revenue will look closely at all benefit arrangements as income tax and National Insurance levels may be reduced.

The interaction of income tax, National Insurance and benefits for employees can create a complex situation and the ability to communicate, administer and simplify a flexible benefit are key to the success of a plan.

Our experience of Flexible Benefits plans means that we are able to offer guidance in both tax and legal issues.