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04: Benefits fully or partially exempt from tax

The following benefits are generally tax-free to all employees. Where there is a taxable benefit, this is reduced by any contribution made by the employee.

Pensions

The most popular benefit is probably the pension scheme, which has certain valuable advantages if it has been registered with HM Revenue & Customs.

  • A company’s contributions are allowed as a deduction against its profits for corporation tax. They are not taxed as benefits on the employees, subject to the annual allowance rules (£50,000 per employee, subject to unused allowance carried forward).
  • If the employee contributes towards the scheme, then the contribution, currently up to a maximum of 100% of remuneration, is allowed as a deduction against the employee’s taxable income.
  • The investment returns from the pension fund are free of UK tax on income and capital gains. Fund managers can therefore achieve higher growth rates than most other investors.
  • A pension may be provided at retirement, subject to the lifetime allowance of the capital value of the pension benefits, currently of £1.5 million.
  • The employee can commute part of the taxable pension for a tax-free capital sum up to 25% of the fund at retirement (or its equivalent).
  • A lump sum on death before drawing the retirement benefits of up to the amount of the lifetime allowance can normally be distributed free of tax among a wide class of beneficiaries.
  • A pension may also be provided to the widow or widower of an scheme member who dies after starting to draw retirement benefits.
Income protection

An employer can enter into an income protection insurance arrangement (previously called permanent health insurance) under which the employer will receive a proportion of the salary of an employee who is unable to work because of ill health.

The employer then pays the amounts involved to the employee.

The employer’s premiums are an allowable expense against corporation tax. The premiums are not a taxable benefit for the employee, provided the employer has discretion over whether to pay the amount on to the employee. In practice, the employer normally has such a discretion, but invariably does pay the amounts on to the employee concerned. Any payments to the employee are treated as a continuation of normal salary and taxed under PAYE.

There are special rules for directors with 20% or more of the shares in the company. Broadly speaking, premiums paid by the employer are not deductible for corporation tax.

Relocation and removal expenses

If an employee is required to move on taking up a new job or is moved by an employer, up to £8,000 of qualifying removal expenses paid by the employer is exempt from tax. Any excess is taxable.

Termination payments

This is a highly complex area, but it is possible for up to £30,000, including the value of any benefits, to be paid tax-free, provided the payment is not made under a contractual liability to the employee.

Bicycles

No tax is charged on the benefit of a bicycle or cycling safety equipment provided by the employer for travel to and from work. The equipment must be available to all employees and mainly used for home to work travel. Free parking for bicycles and motorbikes is also exempt from tax.

Employee share and share option schemes

Employers can enable employees to acquire shares in the company without onerous tax charges through one of the approved schemes or arrangements. Although share schemes can be very beneficial, the rules are complex and many factors must be considered before an employer implements a share scheme.Last Updated 

Tax rules are subject to change. The FCA does not regulate tax advice.