Tax-free perks
A new tax exemption for perks came into effect on 6 April 2016. It applies to all employees, but there are special rules for directors.
So what is the new exemption?
The exemption for job-related low value perks, was originally meant to take effect in April 2015 but it proved too controversial and was postponed. However, it finally came in on 6 April 2016. A low value perk is one where the cost to the employer is no more than £50. Employees are entitled to as many exempt perks as their employer is willing to give them. However, there’s a special limit for directors.
What’s the limit for directors?
Directors are entitled to the tax and NI exemption for low value perks up to the value of £300 per year. That could, for example, be 15 perks of £20 or six perks of £50. To qualify no single perk can cost your company or have a taxable value (whichever is the greater) of £50. The £300 limit also applies to perks provided to a director’s family or anyone that works for them personally, e.g. nanny.
Apart from the financial limits there are further conditions. The exemptions doesn’t apply to:
- Cash payments or vouchers that can be exchanged for cash
- A perk that is provided under the terms of an employment contract. This includes salary sacrifices arrangements: and
- A perk that’s provided in recognition of particular services performed by the employee which is part of their employment duties.
The last two conditions are more likely to apply to employees than directors.
Not all directors
The limit only applies to directors of close companies. now your asking yourself what’s a close company? well broadly speaking a close company is one which is controlled by five people or fewer. For example, if two shareholders own 20% of a company’s ordinary shares each and four other shareholders 15% each, any four of them together control more than 50% of the company’s voting rights and therefore it is a close company.
Examples:
because directors, particularly those of smaller companies, are able to give themselves ad hoc low value perks, the exemption – although limited – is probably worth more to them than their employees.
Example 1: A company agrees to purchase a birthday gift worth £30 for a director’s son and posts it to him at a cost of £5. The exemption will apply
Example 2: The five directors of a company and their spouses go out for a meal. The bill comes to £500. Although the cost per director is £100 it actually represents two perks of £50 each – one for each director and one for their spouse. therefore, the exemption applies.