Modern employee benefit plans provide a number of potential tax advantages to employees and employers.
Employees
Most modern employee benefit plans allow employees to swap some of their existing benefits or purchase new 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, subject to certain limits. This gives a basic rate tax payer earning less than the National Insurance (NI) Upper Earnings Limit (UEL) a saving of 32% compared to receiving the money as salary (based on 2011/12 NI rates). For example, an employee that exchanges £200 per month of their salary for childcare vouchers and additional pension payments will save £768 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 a 12% saving.
Employers
Employers 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 13.8% 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 £331.20.
What are the issues to consider?
Any change to, or implementation of, new employee benefit plans need to be carefully considered. A new benefits package can mean changes to employees' employment contracts and salaries. HMRC may look closely at all benefit arrangements as income tax and National Insurance levels may be reduced so it is important to ensure these are both impleemnted and operated correctly and records kept.
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 modern benefits plan are key to the success of a plan.
Our experience of these plans means that we are able to offer guidance on both tax and legal issues.
