Are employee benefits tax efficient for limited companies?

Are employee benefits tax efficient for limited companies?
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    In addition to building a trusted workforce and retaining your most valuable employees, providing an employee benefits package can result in significant tax savings for your limited company.

    Employee benefits are additional perks employees receive outside of their salary. When structured correctly, these benefits, such as private healthcare, company cars and childcare vouchers, can be tax-efficient for limited companies by reducing their taxable profits and also benefitting employees.

    At Archimedia Accounts, we know very well what it means to build a company that feels like family. Employee benefits are just one way to create loyalty and provide a sense of belonging to your employees. However, we are also business people, so we also understand the importance of being tax-efficient. If you are looking to utilise tax-efficient benefits, then keep on reading.

    Already have an impressive employee benefits package? Then contact Arcimedia today to see how we can help you make more significant tax savings this tax year.

    What are employee benefits?

    Employee benefits are any benefits an employee receives from their employer aside from their gross salary.

    These can be taxable for the employee, but there are many non-taxable benefits, including:

    • Pension contributions
    • Health cover
    • Mileage allowance
    • Life insurance
    • Employee’s personal pension scheme
    • Employee’s occupational pension scheme

    A good accountant will see if any of these are taxable to the employee so you, as an employer, can ensure your employees are incentivised with as much net pay as possible without unnecessary tax implications.

    How do employee benefits work?

    Employee benefits can provide tax advantages for the companies providing them, as well as the employee who receives them. However, this isn’t always the case. To make employee benefits work for your limited company and your employees alike, you should first weigh up your options with an experienced accountant.

    If employee benefits are not taxable, then there is no reflection on their pay, and they don’t need to pay taxes on them. However, if the benefit is taxable, it can go through the payroll with the employee being taxed automatically, or it can go on a P11D, and the employee pays tax at the end of the year.

    Generally, we would suggest putting the benefit on the payroll so the employee would be taxed at source when they receive their pay. When employee benefits go through the payroll, tax is processed in the same way as with their salary. The only difference is, with employee benefits, there is no Class 1 National Insurance (employee’s National Insurance).

    This can save a significant amount of money, particularly if the employee is a basic-rate taxpayer. Their National Insurance will be at 12% (a higher rate taxpayer would only pay 2%). This means basic rate taxpayers are much better off having some benefits in kind (they’re essentially saving 12%!).

    Most employees’ benefits will go on the payroll, with any taxes deducted from their pay. Then the employer pays these taxes to HMRC in the same way it does with a regular salary.

    The alternative way of doing it is through a P11D. In this instance, a P11D is given to the employee by the employer to show what benefit in kind has been provided (for example, insurance or a company car). The employee then has to declare that benefit in kind on their personal tax return and pay the additional tax. To reduce the employee’s admin burden, we recommend using the payroll method.

    Just like with a usual salary, Class 1A National Insurance (employer’s NI) is paid by the employer on the benefit in kind. This is paid to HMRC in the same way it’s done with a salary.

    What tax-efficient benefits are there for employees?

    The best benefits from a tax point of view are those that aren’t even taxed on the employee.

    Some tax-efficient benefits can include health screenings and medical checkups, as they are free of tax up to £500. This is a great way to benefit employees without them incurring taxes. In doing this, you will also receive corporation tax relief as well.

    Other good ways to provide your employees with tax-free benefits are:

    • Employer contributions into a pension: as an employer, you can contribute to a pension for your employees, with the advantage being that there will be no tax and National Insurance implications for them. Since the employee is also saving into their pension, they will not be taxed at all on the amount that is put in.
    • Free or subsidised meals: the tax advantages of company-provided meals can vary depending on the value of the meals and whether they are available to all employees.
    • Pension advice up £500: pension advice is an excellent way to encourage long-term goal setting for your employees. They can receive this employee benefit without needing to pay income tax or NIC.
    • Life insurance provided by the employer: if you pay into a life insurance scheme for your employees, then they can receive this as a tax-free benefit.

    While some of the examples above provide tax and NIC savings for employees, as an employer, you may need to carefully consider some benefits, as the employee may have to pay a benefit in kind, which can be taxed harshly by HMRC. So it is important to weigh up the pros and cons to find the most tax-efficient solution.

    Get in touch today, and we can help you find the most tax-efficient benefits for you and your employees.

    What are trivial benefits?

    Trivial benefits are small gifts given to an employee by their employer. There are restrictions, but essentially an unlimited amount of these gifts can be given to the employee, and they are tax-free!

    There are limits to these types of benefits, which means that each item has to cost less than £50, including VAT. They also can’t be work-related (so they have to be a gesture of goodwill, for example, a birthday, a treat, or a special occasion).

    For Directors of limited companies or their families, the total value of these gifts (trivial benefits) cannot exceed £300.

    What are taxable benefits?

    Taxable benefits are any benefits an employee receives from their employer aside from their gross salary that is taxable by HMRC. A good example of a taxable benefit is having a company car. Employees pay tax based on the car’s value, CO2 emissions and fuel type. Certain vehicles, like electric company cars, can create less of a taxable benefit.

    Some taxable benefits may be more tax efficient for an employee than their regular salary. As an employer, you can get premium rates on certain taxable benefits due to bulk buying, such as gym memberships and medical insurance. While these benefits are taxable to an employee, they may still be more affordable due to the saving you, as the employer, managed to secure.

    Tips for choosing the right employee benefits for your company

    The best way to choose the right employee benefits for your limited company would be to first use the low-hanging fruit benefits, ones where the employee won’t even be taxed. These types of employee perks can include Christmas parties, health screenings, medical checkups, providing exercise equipment for the employees to use, and employee meals.

    After you’ve utilised the tax-free benefits, we’d recommend you then ask your employees what is important to them. If they are looking to increase their future security and build a substantial pension, for example, then this may be a valuable benefit. They’ll be able to save tax and not have to make National Insurance payments too.

    Keeping your employee motivated through their employee benefits will be a great way for your employee and your limited company to save money and reduce tax liability.

    Tax advice and planning from Archimedia Accounts

    At Archimedia Accounts, we are tax planning specialists with over 30 years of experience. We have firsthand experience developing a successful company, so we have unique insight and expertise when it comes to reducing your tax liability. We will work hard to understand your situation to save you and your company money.

    Contact Archimedia and speak to one of our tax experts today!

    So, are employee benefits tax-efficient for your limited company?

    In conclusion, if you have a limited company, then you can generate an effective tax-efficient benefits package for your company and employees. Working alongside an experienced tax accountant will help you make this possible.

    Some of the most attractive tax-efficient benefits to limited companies can include employer pension contributions, trivial benefits, specific health cover packages, childcare vouchers and free meals.

    Finding the right tax-efficient benefits can ease the tax burden on your limited company and your employees. In addition to tax advantages, retaining your most valuable employees can also help your company save more money.

    Further reading:

    Picture of Chris Demetriou

    Chris Demetriou

    Chris is Head of Business Advisory​ at Archimedia Accounts and is a specialist in tax. For more advice book a FREE consultation:

    Contact Chris

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