NON-TAXABLE BENEFITS | Tax Considerations

There are certain benefits that are not taxable. These include (at the present time, 2004) the benefits discussed in the following sections:

§  Accommodation - if it is wholly, exclusively and necessarily for the purposes of the job, this is a non-taxable benefit.

§  Meals - provided they are served to employees in general.

§  Car parking space - provided this is close to or at work.

§  Subscriptions - to approved professional institutions/bodies.

§  Christmas parties and other annual functions - these are not taxable provided the aggregate cost does not exceed £150 in the tax year.

§  Gifts from third parties are exempt where the cost does not exceed £250.

§  Long-service awards - a tax-free award can be made to employees with a minimum of 20 years' service.

§  Counselling services to redundant employees.

§  Mobile phones are also exempt, even when available for personal use by the employee.

§  Costs relating to employee liability insurance, professional indemnity insurance and work-related uninsured liabilities are not a taxable benefit if paid by the employer. If they are paid by the employee, they are allowable as a deduction against earnings.

§  If an employee is relocated, qualifying removal expenses and benefits from the time of the job change to the end of the tax year are exempt up to a maximum of £8,000 per move. If expenses exceed £8,000, they do attract a withholding obligation but the amount does need to be reported on the year-end return.

§  Payments given as compensation for loss of office - these are taxable if they exceed £30,000, subject to current tax legislation.

§  Loans - an interest-free loan up to the value £5,000 is not taxable on the employee.

§  Workplace nurseries - these are not considered to be taxable benefits in kind provided they are places that are made available by the employer.

§  Miscellaneous others - these include the provision of computer equipment, a tax allowance to cover expenses incurred by homeworkers, over night expenses and work-related training.

Approved Pension Schemes

There are essentially two types of pension scheme:

1.     Personal pension schemes: Personal pensions are designed for people who work and who are not members of an employer's occupational scheme. There may be a number of reasons for this, eg the individual is self-employed, the employer does not offer a pension scheme or the employee is not eligible or chooses not to join the employer's scheme. A personal pension operates by building a 'pension pot', which is used to purchase an annuity at retirement. Employee contributions attract tax relief at the highest rate that tax is paid by the individual. The tax relief is claimed through the self-assessment tax return.

2.     Occupational schemes: There are different types of employer pension scheme: final salary scheme and a money purchase scheme. A final salary scheme pays a pension based on an individual's salary at retirement and the number of years of service. A money purchase scheme is used to build up a pot of money, which is used to buy an annuity. Employers are able to make contributions to an approved pension scheme for the employee without attaching a tax charge, provided certain criteria are satisfied.

Contributions made by all employees are also tax deductible from earnings for the employee. The relief available is based on the employee's age. Income accruing within a pension fund does so on a tax-free basis, and employees are able to receive part of their pension fund as a tax-free lump sum at the time of retirement, the remainder being subject to income tax.

There is a pensionable earnings cap of £102,000 for the 2004/05 tax year. For those individuals earning above the cap, employee contributions made in respect of earnings above the cap do not attract tax relief.

Unapproved Pension Schemes

The imposition of the earnings cap has meant that 'high earners', ie those earning above the earnings cap, may desire to make alternative arrangements for their pension fund.

Funded Unapproved Schemes

An employer makes contributions to a trust with the view that the assets grow in value for the benefit of the employee. An employee is chargeable to income tax on the value of the contributions paid into the trust. The employer is entitled to a corporation tax deduction for the contributions made to the trust. When the benefits are taken at retirement, they can either be taken as a lump sum or be used to buy an annuity tax free.

The government has proposed that the UK pension system is changed to simplify it. The proposed changes and briefly described as follows. From April 2006, the pension regime in the UK will undergo significant reform. There will be a lifetime allowance of £1.5 million and funds in excess of this will be taxed at either 25 per cent or 55 per cent. Personal contributions will be restricted to 100 per cent of earnings for tax relief purposes and employer contributions will be unrestricted, but taxed if they exceed £200,000. Pension scheme members who have funds in excess of £1.5 million at 6 April 2006 will be able to register and protect their funds from a tax charge. The minimum age of taking retirement benefits will be increased from 50 to 55 by 2010. The new proposals widen the current investment rules with regard to pension fund investments.