Accounting for employee benefits

By offering a good benefits package in addition to pay you can attract and retain the best employees. Well-structured packages can also help employees reduce their personal tax liabilities. For example, a salary sacrifice approach could reduce employee income tax liabilities and National Insurance contributions (NICs). Your employees might also feel the value of the benefits is higher than the cash equivalent deducted from their pay. This makes it an attractive option for employers and employees alike. Robust employee benefits can also make your company more attractive to prospective employees when they consider your job offer. 

 

For tax purposes both employees and employers must accurately reflect all aspects of remuneration. 

 

Basic-rate taxpayers pay 20% tax on income above their personal threshold, and an additional 12% in NICs. Employers also pay 13.8% NICs on earnings above the secondary threshold. Including the value of benefits can significantly affect the tax paid by employees and employers, affecting take-home pay and profitability. 

 

Income tax. Benefits exceeding specified thresholds are treated as pay that’s subject to tax. For example, this applies to personal use of a company vehicle. 

 

Typically, HM Revenue and Customs (HMRC) treats employee benefits as taxable income called benefits in kind (BIK). You must report them under the P11D tax rules in July each year. 

 

National Insurance Contributions. Some employee benefits are exempt from NICs. However, employers must still pay Class 1A Employer’s National Insurance on the value of the benefits provided to employees. 

 

Discretionary benefit packages help to increase employee loyalty, allowing people to choose whether to take advantage of them. Employers must provide certain mandatory benefits to support and protect all employees maintain their wellbeing. You can choose to enhance these as part of your employee benefit package. However, they can become a legal obligation and non-compliance can result in penalties. 

 

There are a variety of different benefits that might be discretionary or mandatory including: 

 

As an employer you can offer more than the required Statutory Sick Pay (SSP) in your own scheme, but you can’t offer less. Holiday leave entitlement continues to build-up even when employees are on sick leave. 

 

You might offer insurance to protect your employees’ income if they are seriously ill or disabled and unable to work. If you cover the full cost your employees don’t pay tax on the benefit but any income they receive will be taxed. If you offer this as a discretionary salary sacrifice benefit your employees are taxed on it as a BIK.