Many UK employers offer tax-free benefits that can significantly enhance your overall compensation package. These benefits allow you to enjoy additional perks without paying tax on them, helping you save money and boost your financial wellbeing. However, not all benefits are tax-free, and understanding which ones qualify is essential to making the most of what’s available. This detailed guide explains the different types of tax-free benefits, how they work, and how to optimise them within your employment package.
What Are Tax-Free Benefits?
Tax-free benefits are perks provided by your employer that do not attract Income Tax or National Insurance Contributions (NICs). They’re an excellent way for employers to reward and motivate employees while saving both the employee and the employer money compared to equivalent cash payments.
Common Tax-Free Benefits
1. Pension Contributions
Employer contributions to a registered pension scheme are tax-free for the employee. Not only do you avoid paying tax and NICs on these contributions, but they also help build your retirement savings efficiently. Some employers offer salary sacrifice schemes, allowing you to give up part of your salary in exchange for additional pension contributions, reducing your taxable income further.
2. Employer-Provided Mobile Phones
If your employer provides you with a single mobile phone for business and private use, it’s tax-free. However, this only applies to one handset per employee, and it must be provided directly by the employer (not through reimbursement).
3. Childcare Vouchers and Tax-Free Childcare
While the Childcare Vouchers scheme is closed to new applicants, employees who joined before October 2018 can still benefit. Under this scheme, you can receive vouchers up to £55 per week (depending on your tax band) without paying tax or NICs. Alternatively, the Tax-Free Childcare scheme offers 20% government support on eligible childcare costs for working parents, though it’s managed outside the payroll system.
4. Bicycles and Cycling Equipment
The Cycle to Work scheme allows you to obtain a bicycle and related safety equipment through a salary sacrifice arrangement, making it tax-free. This promotes healthy living while offering a valuable tax saving for commuters.
5. Workplace Parking
Free or subsidised parking provided at or near your workplace is exempt from tax. This can be a significant saving, especially in areas where parking costs are high.
6. Meals Provided at Work
Free or subsidised meals provided on the employer’s premises are tax-free if they’re available to all employees generally and are intended for the employer’s convenience (e.g., staff canteens). This can help with day-to-day living costs.
7. Training Courses
Employer-funded training courses that relate to your current role or improve your skills for your current job are tax-free. This benefit not only enhances your career prospects but also avoids tax charges that would otherwise apply if you paid for the training yourself.
8. Long-Service Awards
Gifts or awards given for long service (over 20 years) are tax-free up to a value of £50 per year of service. For example, an award worth £1,000 would be tax-free for someone who’s worked at the company for at least 20 years.
Additional Tax-Free Benefits to Consider
9. Health and Safety Equipment
Items your employer provides for health and safety reasons, such as protective clothing or equipment, are tax-free. This includes high-visibility jackets, hard hats, and specialist tools if they are necessary for your job.
10. Relocation Expenses
If you need to move for work, your employer can pay or reimburse up to £8,000 of eligible relocation expenses tax-free. This includes removal costs, temporary accommodation, and certain travel costs.
11. Eye Tests and Corrective Glasses
If your job involves using a computer monitor or screen regularly, your employer can provide or reimburse the cost of an eye test and necessary glasses or contact lenses to correct work-related vision issues tax-free.
Salary Sacrifice Schemes
Many tax-free benefits are structured through salary sacrifice arrangements, where you give up part of your salary in exchange for a non-cash benefit. Common examples include additional pension contributions, bicycles, and childcare vouchers (if already enrolled). Salary sacrifice reduces your gross pay, thereby lowering both your Income Tax and NICs while still giving you the benefit. However, it’s important to ensure that salary sacrifice arrangements don’t reduce your pay below the National Minimum Wage.
Taxable Benefits to Watch Out For
Not all employer benefits are tax-free. Benefits such as company cars, private medical insurance, and low-interest loans generally attract a tax charge. These are reported on your P11D form and are subject to Income Tax and possibly NICs. It’s crucial to understand the tax implications of each benefit to avoid surprises.
Maximising the Value of Tax-Free Benefits
Here’s how to make the most of tax-free benefits:
- Review Your Contract: Check your employment contract or staff handbook to see which benefits are offered by your employer.
- Use Salary Sacrifice Wisely: Consider sacrificing part of your salary for benefits like additional pension contributions or bicycles to reduce your taxable income.
- Plan Ahead: Think about long-term benefits, like pensions, that can significantly impact your financial security in retirement.
- Ask HR: Speak to your HR department to clarify which benefits are available and how to access them tax-efficiently.
Record-Keeping and Compliance
Keep records of any benefits you receive, especially if you need to claim tax relief or if HMRC asks for verification. Employers usually report taxable benefits on your P11D or through payroll. For tax-free benefits, confirm with your employer whether they are processed under salary sacrifice or provided directly, as this affects your pay and tax calculations.
When to Seek Professional Advice
While most tax-free benefits are straightforward, more complex arrangements—such as salary sacrifice, share schemes, or relocation packages—may require advice from a tax adviser or accountant to ensure compliance and optimise the financial benefits.
Conclusion
Tax-free benefits are a valuable part of your compensation package that can enhance your overall earnings and save you money. From pensions and mobile phones to cycle-to-work schemes and training, understanding what’s available and how to use it can make a significant difference to your finances. Take time to review your options, ask questions, and plan your benefits carefully to make the most of what your employer offers—and keep more of your hard-earned money in your pocket.
