Christmas, the traditional time for giving is fast approaching.
Many employers choose this time to reward their staff for the hard work and commitment over the past year by giving them gifts (benefits) in the form of non-cash items.
Unfortunately, unless handled correctly the gifts may give rise to income tax and national insurance contribution liabilities for the employee, not quite the consequence that the employer wanted.
The bookkeeper’s role in all of this could be to inform their employer (or client) the available mechanisms for giving benefits, the advantages and disadvantages of each, and then, keeping track of any benefits given.
So here are the different ways in which benefits can be made to employees. And how the employer can either pay the statutory payments themselves or, if the monetary value of a benefit is small enough, avoid income tax and national insurance liability altogether.
PAYE Settlement Agreements
A PAYE Settlement Agreement (PSA) is a scheme whereby the employer pays the employee’s income tax and national insurance liabilities due on the benefit. The employer can choose:
- To reduce the administration involved in trying to apportion or otherwise allocate the cost to individual employees.
- To avoid demotivating the employee by giving rise to a tax and national insurance liability.
The rules on the type of gift or benefit that can be included in the PSA are quite specific. They benefit must be:
- Minor, for example, a bouquet of flowers on the birth of a child, or in celebration of a birthday.
- Irregular, such as paying relocation expenses above the statutory limit.
- Impractical or impossible to ascertain the individual cost to employees.
What cannot be treated under the PSA is:
- Cash payments or cash allowances.
- Benefits such as company cars, accommodation and other such major and regular items.
Once the gift is deemed to meet the PSA rules, the next step is to work out the income tax and national insurance liability.
Calculating the income tax
The tax payable under a PAYE Settlement Agreement (PSA) is the amount calculated on the taxable value of the benefit and grossed up.
The information needed in order to calculate and gross up the PSA is:
- The amount of the benefit given.
- The number of employees included.
- The employees’ marginal rate of tax.
Once this information is available then all that needs to be done is the arithmetic necessary to gross up the benefit in order to calculate the statutory payments due.
Calculating the NICs
Though Class 1 NICs are not due on the grossed up tax, class 1B NICs are and would be calculated on the benefit received, plus the tax payable.
The national insurance liability for Scottish taxpayers will remain the same. However, there are, from 2017-18 tax year different tax thresholds for the higher and additional rate bands. Employers must be aware of this and use the appropriate rate threshold when calculating the income tax liability.
Setting up a PSA
At present, this can be done by writing to the employer’s Tax Inspector informing the Inspector that there is the wish to set up a PSA, listing the benefits and expense payments that will be covered. And when agreed with the Inspector, signing an agreement to confirm the decision.
The decision must be confirmed by 6 July following the end of the tax year to which it relates. PSAs can be agreed at any time in the tax year. However, pre-agreement benefits cannot be included, only those benefits given after the agreement was set up are eligible.
From tax year 2018-19 the process will be simpler in that:
- There will be no need for advance agreement to a PSA.
- There will be an online service for the submission and settlement of PSAs.
- HMRC will improve the guidance on what can and cannot be included in a PSA.
So, a PSA is available for minor, irregular benefits that may be impractical to allocate to individual employees. There is also a new statutory exemption available that allows gifts to be given to an employee, tax and national insurance free.
April 2016 saw a new statutory exemption for trivial benefits introduced. The limit of the benefit is £50 and the important points about trivial benefits are as follows:
- An employee can receive an unlimited amount of trivial benefits unless the employer is a ‘close company’ (up to and including five directors), in which case there is an annual limit is £300 per director.
- Cash benefits are excluded but vouchers are included as long as they cannot be exchanged for cash.
- The benefit must be unrelated to the performance of their duties. This is so that employers cannot replace normal pay with a trivial benefit and avoid paying tax and NICs.
- Trivial benefits cannot be used with any salary sacrifice arrangements or other similar arrangements.
There are various mechanisms by which an employer can reward employees for their hard work and commitment without causing the employee to suffer an additional income tax and national insurance contribution.
The administrative burden will probably fall to the bookkeeper, so keep accurate and separate records of what is covered by a PSA and what is defined as a trivial benefit. But most importantly, make the employer aware of the options available, and you never know, there may be a ‘little something’ for you under the company Christmas tree sometime soon.
Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.