Exempt beneficial employee loans

An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.

There are scenarios where beneficial loans are exempt and employers might not have to report anything to HMRC or pay tax and National Insurance. The most common exemption relates to small loans with a combined outstanding value to an employee of less than £10,000 throughout the whole tax year.

The list also includes loans provided:

  • in the normal course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee)
  • to an employee for a fixed and invariable period, and at a fixed and invariable rate that was equal to or higher than HMRC’s official interest rate when the loan was taken out
  • under identical terms and conditions to the public as well (this mostly applies to commercial lenders)
  • that are ‘qualifying loans’, meaning all of the interest qualifies for tax relief
  • using a director’s loan account if it is not overdrawn at any time during the tax year.

HMRC’s official interest rate is currently 2%.

Are you taking advantage of trivial benefits?

The trivial benefits in kind (BiK) exemption applies to small non-cash benefits like a bottle of wine or a bouquet of flowers given occasionally to employees. By taking advantage of the exemption employers can simplify the treatment of BiKs whilst at the same time offering a tax efficient way to give small gifts to employees.

Although the benefit is defined as ‘trivial’, employers should remember that this offers a great opportunity to give small rewards and incentives to employees. The main caveat being that the gifts are not provided as a reward for services performed or as part of the employees’ duties. However, gifts to employees on milestone events such as the birth of a child or a marriage or other gestures of goodwill would usually qualify.

The employer also benefits as the trivial benefits do not have to be included on PAYE settlement agreements or disclosed on P11D forms. There is also a matching exemption from Class 1A National Insurance contributions.

The tax exemption applies to trivial BiKs where the BiK:

  • is not cash or a cash-voucher; and
  • costs £50 or less; and
  • is not provided as part of a salary sacrifice or other contractual arrangement; and
  • is not provided in recognition of services performed by the employee as part of their employment, or in anticipation of such services.

The rules also allow directors or other officeholders of close companies and their families to benefit, but overall payments made in a tax year cannot exceed £300. The £50 limit remains for each gift but could allow for up to £300 of non-cash benefits to be withdrawn per person per year.  The £300 cap does not apply to employees. If the £50 limit is exceeded for any gift, the value of the benefit will be taxable.

Check if you can claim working from home expenses

If you are an employee who is working from home, you may be able to claim tax relief for some of the bills you pay that are related to your work. 

Note that if an employee is working at home voluntarily, they cannot claim tax relief. However, these tax reliefs are available to anyone who has been asked to work from home due to the COVID-19 outbreak. HMRC received more than 3 million claims for the tax relief for the 2020-21 tax year and has also confirmed that the tax relief will continue to be available in the current 2021-22 tax year.

HMRC’s Director General for Customer Services, recently commented that:

'Half a million people have already reduced their Income Tax this year by up to £125, by claiming tax relief on their working from home expenses.'

Employers may reimburse employees for the additional household expenses incurred by working at home. The relief covers expenses such as business telephone calls or heating and lighting costs for the room in which you are working. Expenses that are for private and business use (such as broadband) cannot be claimed. Employees may also claim tax relief on equipment purchased to facilitate working at home such as a laptop, chair or mobile phone.

Employers can pay up to £6 per week (or £26 a month for employees paid monthly) to cover an employee’s additional costs if they must work from home. Employees do not need to keep any specific records if they receive this fixed amount. 

If the expenses or allowances are not paid by the employer, then the employee can claim tax relief directly from HMRC. Employees will get tax relief based on their highest tax rate. For example, if they pay the 20% basic rate of tax and claim tax relief on £6 a week, they will get £1.20 per week in tax relief (20% of £6). Higher rate taxpayers would receive £2.40 a week (40% of £6). Employees can claim more than the quoted amount but will need to provide evidence to HMRC. 

Mobile phone exempt costs

When an employee incurs costs for the provision of mobile phones to employees it is important to understand the correct tax treatment of these expenses. This includes costs for phones provided to employees and reimbursement of employee’s own phone costs.

As a rule, the provision of one mobile phone to a director or employee for private use is exempt from reporting requirements, tax and National Insurance. The exemption covers the phone itself, any line rental and the cost of private calls paid for by the employer on that phone. The phone contract must be between the employer and the supplier.

If the telephone expenses are not exempt, then they must be reported to HMRC and employers may have to deduct and pay tax and National Insurance.

Some mobile phone expenses are covered by exemptions. 

For example, if an employee arranges the phone but you pay the supplier then you must:

  • report the cost on form P11D
  • pay Class 1 National Insurance through payroll

HMRC also makes it clear that there remain devices that have telephone functionality that do not qualify as mobile phones. The tax exemption applies only to devices primarily designed for voice communication. For example, the rules do not apply to tablets, PDAs and other similar devices.

Changing the terms of a salary sacrifice arrangement

A salary sacrifice arrangement is effectively an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. This can include items such as company cars, childcare vouchers and additional employer pension contributions.

The tax and NIC advantages of certain benefits provided as part of a salary sacrifice arrangement were removed from 6 April 2017. The change effectively removed the Income Tax and employer NIC advantages of certain benefits provided as part of salary sacrifice arrangements such as mobile phones and workplace parking. There was a transitional plan in place for certain benefits until 6 April 2021.

If an employee wants to opt in or out of a salary sacrifice arrangement, the employer must alter their contract with each change. The employee’s contract must be clear on what their cash and non-cash entitlements are at any given time.

It may also be necessary to change the terms of a salary sacrifice arrangement where a lifestyle change significantly alters an employee’s financial circumstances.

This may include:

  • changes to circumstances directly arising as a result of coronavirus (COVID-19)
  • marriage
  • divorce
  • partner becoming redundant or pregnant

Salary sacrifice arrangements can allow opting in or out in the event of lifestyle changes like these.

Exempt beneficial loans

An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.

There are a number of scenarios where beneficial loans are exempt and employers might not have to report anything to HMRC or pay tax and National Insurance. The most common exemption relates to small loans with a combined outstanding value to an employee of less than £10,000 throughout the whole tax year. 

The list also includes loans provided:

  • in the normal course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee)
  • to an employee for a fixed and invariable period, and at a fixed and invariable rate that was equal to or higher than HMRC’s official interest rate when the loan was taken out
  • under identical terms and conditions to the general public as well (this mostly applies to commercial lenders)
  • that are ‘qualifying loans’, meaning all of the interest qualifies for tax relief 
  • using a director’s loan account as long as it’s not overdrawn at any time during the tax year.

Annual party benefits

The cost of a staff party or other annual entertainment is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below then there is no requirement to report anything to HMRC or pay tax and National Insurance. There will also be no taxable benefit charged to employees.

  1. An annual function offered to staff generally is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  2. The event must be open to all employees. If a business has multiple locations, then a party open to all staff at one of the locations is allowable. You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  3. There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable.
  4. It is not necessary to keep a running total by employee but a cost per head per function. All costs including VAT must be considered. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

Note, the £150 is an exemption and not an allowance. This means that any costs over £150 per head are taxable on the full cost per head.

It is highly recommended when planning a staff party or other annual event to aim to stay within the parameters outlined above to ensure there is no additional tax cost to the party.

Tax-free gifts for Christmas

After a very difficult 2020, the traditional Christmas break is almost with us. If you are an employer and looking to give your employees a small token of appreciation for Christmas, then your best option is probably to give them a gift. In order to ensure that this is not a taxable gift, it is important to that the trivial benefits in kind (BiK) rules apply.

There is no tax to pay on trivial benefits in kind (BiK) provided to employees where all of the following apply:

  • the benefit is not cash or a cash-voucher; and
  • costs £50 or less; and
  • is not provided as part of a salary sacrifice or other contractual arrangement; and
  • is not provided in recognition of services performed by the employee as part of their employment, or in anticipation of such services.

So, for example a turkey that cost £45 would qualify as would a £15 bottle of wine. It is also possible to provide employees with a gift voucher (not a cash-voucher) where the value is £50 or less. It is important to remember that the gifts must not be provided in recognition of the employees’ services but merely as a gesture of goodwill at Christmas.

There is an annual cap for directors of a ‘close’ company of £300 per year. If the Christmas gifts have a value of over £50 or cannot be counted as a trivial benefit then the gift must be reported on form P11D and Class 1A NICs will be payable on the value of the gift.

Holiday entitlements if furloughed

The Coronavirus Job Retention Scheme (CJRS) commonly known as the furlough scheme is open to all UK employers and will now run until 31 March 2021. From 1 November 2020, employees will receive up to 80% of their salary for hours not worked with a review date in January.

One common question concerns holiday pay entitlement if furloughed. Employees will accrue holiday entitlement while they are furloughed and can also take leave while on furlough.

If a furloughed worker is not working on a bank holiday they usually take as paid leave, they can agree with their employer to either take it as normal or to take it at a later date.

An employer can continue to claim for a furloughed worker’s wages when the worker takes annual leave. If the holiday pay is more than the employee earned whilst on furlough their employer must pay the difference.

The government has also passed legislation to relax the restrictions on carrying leave between leave years during the coronavirus pandemic. Since 26 March 2020, where it has not been reasonably practicable for a worker to take some or all of the 4 weeks’ holiday due to the effects of coronavirus, the amount not taken may be carried forward into the following two leave years.

Tax-free perk for Christmas

If you are an employer and looking to give a small Christmas bonus to your employees, then your best option is probably to give them a gift. In order to ensure that this is not a taxable gift, it is important to ensure that the trivial benefits in kind (BiK) rules apply.

There is no tax to pay on trivial benefits in kind (BiK) provided to employees where all of the following apply:

  • the benefit is not cash or a cash-voucher; and
  • costs £50 or less; and
  • is not provided as part of a salary sacrifice or other contractual arrangement; and
  • is not provided in recognition of services performed by the employee as part of their employment, or in anticipation of such services.

So, for example a turkey that cost £45 would qualify as would a £15 bottle of wine. It is also possible to provide employees with a gift voucher (not a cash-voucher) where the value is £50 or less. It is important to remember that the gifts must not be provided in recognition of the employees’ services but merely as a gesture of goodwill at Christmas.

There is an annual cap for directors of a ‘close’ company of £300 per year. If the Christmas gifts have a value of over £50 or cannot be counted as a trivial benefit then the gift must be reported on form P11D and Class 1A NICs will be payable on the value of the gift.