Every individual running a business must have some basic understanding of the tax rules & its conditions in order to maximise the benefits from the business and minimise the taxes legally.
During the course of business, small business owners provide many small unexpected gifts / Benefits to their employees and same can be considered as tax free trivial benefits saving business and employee’s hassle of reporting / compliance and most important tax and NI.
Please remember trivial benefits have no restriction on number of times you can provide to your staff and therefore may no longer be trivial. To Qualify a benefit or gift or expense must qualify certain conditions and it’s important to understand them. There are two types of conditions out of which one is applicable on employee’s i.e. basic conditions and other conditions are applicable on directors & their families.
Basic conditions (Applicable to Employees)
Basic conditions are the conditions which are applicable on employees –
- The benefit provided by the employer to the employee should not be a cash or a cash voucher.
- Each benefit provided by the employer to the employee should not cost more than £50.
- The benefit provided is not as part of any contractual obligation.
- The benefit provided should not be for recognition of employment duties performed by the employee.
Conditions 1 & 2 are easy to access whereas conditions 3 & 4 are not so obvious.
Example when condition not met – If an employer provides breakfast to only those employees who agree to come early to the office to perform their employment duties, it will not be considered as a trivial benefit as condition 4 is broken. Condition 4 states that the benefit provided by the employer to the employees should not be in response to the employment duties performed by the employee but above example shows that the employer is providing breakfast to only those employees who are coming early to the office in order to perform their employment duties. Hence, condition 4 is not met and breakfast is not a trivial benefit.
Example when conditions met – If an employer unexpectedly buys chocolates for the employees in the office on a day where his favourite team has won a game. This reward from the employer will be classified as a trivial benefit as it is provided without any reason and the employee has done nothing to receive this cool treat from the employer.
Annual limits (Directors and family members related to directors)
There is no cap on the number of trivial benefits that can be provided by the employer to the employees in a single tax year but every item provided by the employer to their staff should meet these 4 basic conditions in order to be considered as a trivial benefit. You do not have to aggregate the cost of all items provided by the employer to the employees to find out the total cost for a particular tax year. The rules for directors of a close company are slightly different.
- In case of Director – In case when trivial benefits are provided to the director or its family members by a close company, there is a specified annual limit of £300 per employer per tax year.
- In case of director’s family – In case if there are several members in the same family who are directors or employees of the close company, each person is eligible for the annual limit of £300 on the trivial benefits he or she will receive in a relevant tax year. However, in case the members of the director family are not employed as directors or employees, the value of trivial benefit will count towards the director’s annual limit of £300.
Exemptions for Trivial Benefits
However, there are many exemptions to the conditions specified above which may apply to make the benefit tax free. For ex – If an employer provides taxis to all those employees who are going late to their homes after office work, this benefit can be considered as tax free subject to strict parameters.
For ex – If an employer provides free or subsidised meals to the employees at the work place, the cost of those meals can be a tax-free affair as per staff canteen rules.
These tax tips are very important and should be followed by small business owners in order to provide and receive tax free & NIC free trivial benefits.