Employees and employers are liable to deduct income tax and National Insurance Contributions (NICs) on certain company benefits such as cars, accommodation, private medical insurance and loans.
For certain benefits, the employer deducts the income tax and NICs due from wages through PAYE, whereas other benefits must be reported through self-assessment. The tax, NICs and reporting obligations vary according to the type of benefit provided.
However, some company benefits are income tax and/or NICs free, such as childcare, canteen meals and mobile phones, where certain conditions are met. Certain benefits can also be provided under salary sacrifice arrangements, which are tax efficient for the employee.
Employer loan arrangements in particular have become popular for employers looking to assist employees with their finances. The tax consequences of such arrangements must be considered from the outset.
Broadly, where a loan is made directly by the employer to the employee, if the interest rate is below the official interest rate, the employee is treated as receiving a benefit in kind for UK tax purposes. As a result, subject to certain exceptions, the employee will be liable to income tax and NICs on the difference between the official rate of interest and the interest paid (if any). The exceptions apply broadly to:
- Loans on ordinary commercial terms made in the employer’s ordinary course of business of lending money that meet certain conditions.
- Fixed-rate, fixed-term loans subject to interest that was no less than the official rate of interest in the year it was made.
- Loans not exceeding £10,000 at any time in the tax year.
- Loans where the interest qualifies for certain tax relief.
- Loans for necessary or incidental overnight expenses that meet certain conditions.
From the employer’s tax perspective, if the employer is a “close company” and makes a “cheap loan” to an employee who is also a “participator” or an associate of a participator, such as a shareholder, the loan will trigger a punitive tax charge on the employer under the "loans to participator" rules, unless an exception applies. Where payable, the tax is levied on the employer as corporation tax at the upper dividend rate.
Employers must take care that benefits do not trigger tax charges that leave employees worse off in terms of paying tax on the benefits, nor inadvertently take employees’ pay below the national minimum wage, which can be a criminal offence.