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Employers: check flexible benefit packages are tax compliant


Published: 28 Jun 2022 Update History

Flexible benefit packages can offer tax and NIC advantages. They can simplify administration, as well as making the benefit package more attractive to employees. However, ICAEW’s Tax Faculty warns that the underlying tax rules should not be overlooked.

There are various flexible employer-provided benefits-in-kind (flexible benefit) scheme packages on the market. Many purport to take advantage of salary sacrifice and other tax exemptions. Employers should check their implementation of such schemes to ensure that they meet the tax rules. A particular scheme may match the promoter’s claims about the tax implications, while others may not.

Problems that arise include: the conditions for salary sacrifice not being satisfied owing to incorrect implementation, or the conditions for specific exemptions not being met (eg, trivial benefits).

The provision of each benefit within the package should be reviewed to ensure the conditions for that specific tax exemption are met. For example, the trivial benefit exemption only applies if the benefit is not a reward for services. This is difficult to achieve if the benefit is part of the employee’s reward package. Allowing employees to “spend” unused benefits-in-kind allowances may also give rise to a PAYE liability.

The optional remuneration rules must also be considered. In order that the correct taxable amounts are reported, employers must determine whether these rules provide an alternative taxable benefit figure.

The Tax Faculty therefore recommends that, to avoid an unexpected PAYE tax and national insurance bill later on, employers should check the operation of their flexible benefit plans carefully. If necessary, they should take advice to ascertain whether the tax implications of the various benefits are being correctly reported.

Flexible benefit packages should also be reviewed whenever there is a change in the benefits legislation.

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