Top tax-free benefits for staff

Thanks to the freezing of key tax thresholds, such as the personal allowance (£12,570) and higher-rate threshold (£50,270), over recent years more employees have been pulled into tax – and tax at higher rates – than ever before. The phenomenon is called “fiscal drag” and makes it even more important to find tax-efficient benefits that your staff will appreciate.

As a general rule, anything an employer provides to their employees that has a value – cash, vouchers or benefits – needs to be assessed to tax. Special benefit-in-kind rules make sure that providing the perks staff might appreciate – such as private healthcare or a company car – are all assessed to tax. However, there are a few benefits that can be provided tax-free if employers stick carefully to the qualifying conditions and (in most cases) don’t ask staff to give up their salary in exchange for the benefit.

As a general rule, anything an employer provides to their employees that has a value – cash, vouchers or benefits – needs to be assessed to tax

Since April 2017, if an employer offers an employee a choice between receiving either a benefit or extra salary (or asks the employee to give up salary in exchange for a benefit), then special rules mean the employee will be taxed on whichever gives the highest tax bill: the salary given up or the benefit received. Only certain benefits, including pensions, ultra-low emission cars, cycle-to-work schemes and employer-provided childcare, can be provided in exchange for salary without losing the tax benefits.

Pensions

One of the most traditional benefits provided by employers is the workplace pension. The latest figures (for 2022) show that 88 percent of eligible employees were part of a workplace pension (Gov.uk, 2023). This high level of engagement is a result of legislation introduced in 2012 that requires employers to enrol staff into a workplace pension scheme automatically unless the employee opts out.

In general, employer payments into a pension are tax-free and help employees to provide for their retirement. Only very highly paid employees need to worry about exceeding the annual allowance for pension contributions of £60,000 a year.

For all but the lowest-paid workers, the value of any pension payments made by the employee can be enhanced if the pension contributions are made via salary sacrifice. This means the employee agrees to accept a lower salary in exchange for higher pension contributions from their employer. This approach creates national insurance (NI) savings for both the employee and employer. Some employers will even go so far as to pay some of their NI savings into employees’ pension funds to encourage them to adopt this approach.

While it is very likely employers already offer staff a pension scheme, moving towards making their contributions via salary sacrifice could enhance the benefits further.

Workplace nurseries

To help support employees with families, employers can provide tax-free childcare, but only if they are prepared to operate a workplace nursery. To qualify for tax-free status, this nursery must have all the necessary registrations and approvals and be made available to all employees.

Creating a workplace nursery is clearly a substantial undertaking but could be an enormously popular benefit

Creating a workplace nursery is clearly a substantial undertaking but could be an enormously popular benefit. It could help to attract and retain staff, where an employer has the necessary facilities and capacity.

Healthcare

Welfare counselling and health screening

In general, the provision of counselling services for employees is a taxable benefit. However, HMRC allows an exemption for employers to pay for “welfare counselling”. This covers a range of specific issues, including stress, problems at work, debt problems, alcohol and other drug dependency issues and even harassment or bullying. The full list is available in HMRC’s Manuals. The potential areas for tax-exempt counselling are itemised as it is not HMRC’s intention for all forms of counselling to be covered. For example, advice on tax, financial or legal matters is specifically excluded.

Employers can also provide one health screening or one medical check-up per employee per year. Of these, the first is more likely to be a questionnaire-type exercise to highlight potential health risks, while a medical check-up is likely to involve a physical examination.

Flu jabs or vouchers

Employers concerned about influenza causing problems for their staff can provide employees with either a flu jab on site or a voucher for the employee to receive a jab at a pharmacy without a tax charge arising.

Be warned, though, that this favourable tax treatment is currently only available where the employer pays directly for the benefit; if an employer reimburses the employee for the cost of their flu jab, this creates a tax charge on the cash received. This is one of the more annoying aspects of the tax code, as the outcome in both cases is the same – a vaccinated employee less likely to fall sick.

As rules currently stand, there is no similar exemption for COVID-19 vaccines and employers need to be aware of this. One potential solution to the tax problem for any employer looking to pay for COVID-19 jabs might be to treat it as an exempt trivial benefit – covered below. However, that would require the jab to cost under £50 and be paid for directly by the employer (and not reimbursed to the employee).

Eye tests

In jobs that involve staff use of a computer screen, employers can pay for an eye test and the cost of any glasses or contact lenses needed when using visual display units (VDU) without creating a benefit in kind. However, this is quite a narrow test: if the employer tries to pay for glasses that are intended for more general use, this will create a tax charge. Only the element of cost that relates to a special prescription for VDU use can be paid tax-free.

In jobs that involve staff use of a computer screen, employers can pay for an eye test and the cost of any glasses or contact lenses needed when using visual display units without creating a benefit in kind

As with flu jabs, the employer needs to either meet the cost directly with the optician or provide a voucher for an eye test. If the employer reimburses the cost of an eye test incurred by the employee, the reimbursement will be taxable.

Travel

Parking

Employers who provide car parking for staff at or near their workplace are not providing a benefit in kind, even if it costs the employer to hire spaces.

Car charging – electric vehicles

If an employer has provision to charge electric vehicles and makes this available to all employees – including for their own electric cars and not just company cars – then no benefit in kind will arise on the costs of charging. This generous exemption applies even if the employee then uses the charge for private mileage, such as driving home from the office.

Late-night travel

If staff need to work late (defined as beyond 9pm) and by that point public transport has ceased/is impractical or car-sharing arrangements have broken down, employers can pay to help that employee get home, provided it is not a regular occurrence. Often viewed as the “tax-free taxi” clause, employers can help employees burning the midnight oil get home in this manner up to 60 times a year before it becomes taxable. 

Pool cars and bikes

Rather than asking employees to use their own vehicles, an employer can provide pool cars or bikes for use when on company business without creating a tax charge. The cars and bikes should be kept on the employer’s premises overnight, be available to all staff and be used exclusively for work-related journeys. Employees may be glad not to add further wear and tear to their own vehicles, while employers can be sure that cars used for their business are adequately maintained and potentially carry the company’s branding.

Cycle-to-work schemes

Cycle-to-work schemes allow employers to provide bicycles and safety equipment to their employees tax-free, provided the equipment is used mainly for travel from home to work. The bike doesn’t have to be used for the whole journey, so cycling to/from a train station is fine, as is some private use, but the main purpose must be for work journeys.

Cycle-to-work schemes allow employers to provide bicycles and safety equipment to their employees tax-free, provided the equipment is used mainly for travel from home to work

Under these schemes, the employer owns the equipment and hires it to the employee. The tax benefit comes from the fact that the employee is allowed to pay the hire costs from gross salary before tax. At the end of the hire period, the employee can acquire the bike from the employer as long as they pay the market value for the bike. HMRC provides a scale to help estimate the value. So for example, after two years, HMRC will accept that the market value is 13 percent of a bike that originally cost under £500 and 17 percent for a more expensive bike.

If employers wish to use the scheme, they must make it available to all employees.

Cycle-to-work days

Finally, meals or refreshments provided on dedicated “cycle-to-work days” to encourage staff to cycle on those days can be provided tax-free. But this only applies on designated days organised by the business, not as an excuse for a free breakfast every day.

Summary

It’s a given that HMRC exists to bring in revenue that allows for the proper functioning of government. However, as noted above, that doesn’t mean that there aren’t little schemes in operation that can give staff a bit extra without penalty. It just takes a little time and effort to be able to use them correctly.