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Detailed Practice Notes written by our Professional Support Lawyers, guiding you through the key issues in each topic.
Benefits - overview
Employers and employees alike may benefit from substituting part of the employee's wages with various forms of payment in kind. This is because a large employer may be able to use its bulk spending power to buy insurance or vehicles more cheaply than an individual. Also, the tax treatment of certain benefits in kind is more beneficial to the employee than of payments in cash.
Benefits are not subject to more favourable tax treatment if the employee is able to waive the benefit and claim higher earnings instead. If this is the case, the taxable amount is the amount of the wage or salary that would be paid in lieu of the benefit.
Are benefits 'wages'?
A benefit in kind is not wages unless it is vouchers, stamps or a document which can be expressed in monetary terms and is exchangeable for money, goods or services. Most benefits in kind set out here are not wages. This means that they are not pay for statutory purposes.
Taxation of benefits
The basic rule is that a benefit is taxed on the extent to which it could be turned into money: the 'second hand value' principle. In many situations, that value will be very small. There are supplementary provisions contained within the Income Tax (Earnings and Pensions) Act 2003 which in practice set out the charges applied.
Special rules apply to the taxation of benefits such as:
company car: see Car or car allowance
medical or life insurance: see Insurance
shares or share options: see Share ownership plans
discounts and subsidies: see Discounts and subsidies
On the other hand, some benefits are not taxed at all. For further information, see Non-taxable benefits
Lower paid employment
The taxation provisions set out in each instance do not apply if a worker earns less than £8,500 a year. Where this is the case, the residual value of the benefit (eg car, loans) is taxed.
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