Save € 17,000 on a new Tesla, but pay tax on a rugby ticket?
Like all taxes, benefit in kind has its quirks, but employees need to wise up to the extra tax they’re paying on work perks
Thanks to an amendment to the BIK regime, if your employer were to buy you a new Tesla (if they could track one down) retailing at about €100,000, you would get to save €17,160 a year in taxes. Photograph: CHANDAN KHANNA/AFP/Getty Images
It’s not just your income that you pay tax on; if you earn more than €1,905 a year, a host of other perks and benefits you enjoy through your employment will also be subject to tax at a rate of up to 52 per cent. These can all add up to a higher tax burden than you might have realised.
Until 2004, benefit in kind (BIK) was self-assessed, but since then, the onus is on the employer to account for the tax with the Revenue Commissioners.
“What it has done is moved the onus on employers to calculate the amount of tax due on benefits and collect the tax,” says Pat O’Brien, executive director with EY.
Like all taxes, there are some aspects of the regime that might surprise. You could call it “nuanced”, or you could call it downright unfair. Consider a hard-pressed family struggling to meet childcare costs, with no tax deductions allowable, and a well-heeled executive entitled to free school fees for his children, with no tax liability imposed, under the Special Assignee Relief Programme (Sarp) regime.
The only way most of us can avoid some of the costs below is through the €500 small benefits scheme, which allows an employer give an employee a benefit of up to €500 tax free. However, even here, a caveat applies; the benefit can only be availed of once, so if you get a €100 tax-free voucher, your benefit is gone, and everything else will be subject to BIK.
So what are you paying (even more) tax on that you may not have realised?
If you have a dedicated on-site childcare facility, or discounted childcare available through your employer, you may feel you’re one of the lucky ones, given the exorbitant costs many families face. However, what you may be unaware of is that this benefit is taxable. So, if you get free childcare from your employer, you will have to pay tax on the amount it is costing them, while if you get subsidised childcare, the value of this benefit is taxable.
Some employers offer their employees loans at preferential interest rates. Typically, you could expect a lender to offer better rates to their staff on mortgages, car loans and so on, but it’s not just banks. Universities around the country also offer preferential loans to help their staff to raise finance to pay for a deposit.
At Trinity College Dublin, for example, the university offers its employees preferential loans of up to €26,000 to help them secure a home. Full-time staff members are given up to 10 years to repay the loan, and in 2016, TCD gave loans of some €54,000, down from €65,000 in 2015.
According to Revenue, this benefit – ie the difference between the preferential rate, and the rate specified by Revenue, is taxable, and liable for PAYE, PRSI, and USC. At present, the Revenue-specified rate on a home loan is 4 per cent, down from 5 per cent in 2012, so if you’re only paying 2 per cent on your preferential loan, you must pay BIK on the benefit of the lower rate. The rate for all other loans is 13.5 per cent, up from 12.5 per cent in 2012.
If your employer offers gym or sports club membership, again, it’s not entirely free, as BIK applies.
Perks and client benefits
You’ve been invited to attend a rugby match in London, with flights and accommodation all in; or maybe you’re going on a skiing trip with another client, or are hosting clients yourself for dinner and the theatre. But should you be paying taxes on these perks?
According to O’Brien, it can come down to the “realisable value of the benefit”. So, for example, a trip offered by a client has no cash value should you turn it down, and so shouldn’t be subject to BIK; in the latter example, if you’re hosting clients in the course of your employment, BIK should not apply either.
As O’Brien concedes however, “it can be a bit of a grey area” and can be a contentious point, with practitioners interpreting whether or not BIK applies differently.
If your employer provides you with a car, it will still cost you through the tax system. As O’Brien notes, typically if you hold a car for more than three years, you will be paying more than the value of the car.
BIK on cars works by calculating 30 per cent of the cash value of the car and applying tax to this, with a reduction for business travel over 24,000km. So for example, a car worth €30,000 will cost an employee €2,000 a year in tax for lower rate payers, and €5,200 for those on the higher rate.
According to O’Brien, calculating BIK on cars is “complicated and employers don’t always get it right”. It’s something an accountant will always seek to assess.
“If we do a PAYE audit it’s the first thing we’re going to look at,” he says.
While Revenue is wise to sharp practices, such as overstating work-related mileage to avail of a lower BIK rate, the good news for employees is that if an employer is found to have under-accounted for BIK, it’s the employer, and not the employee, who must make up the difference.
Many multinationals have done away with the hassle of providing company cars, and instead offer a car allowance instead, which ostensibly should be used towards the cost of their car, but is often put towards other household expenses. So what rule applies here?
Well, according to Revenue, “these sums of money are pay”, which means they are subject to tax, PRSI and USC. So, for example, if your employer offers you an allowance of €400 a month, you will end up paying tax on this, which reduces the benefit to €192 if you pay tax at the higher rate, or €320 if you pay at the standard rate.
According to O’Brien, if you drive, you may have been better off with the car rather than the allowance.
“You’re better off with a car than a car allowance,” he says, because of the notion of “salary sacrifice”, whereby the value to you of the car (including insurance, maintenance etc) is greater than the taxable value.
There is also the potential to benefit from zero rate BIK if your employer purchases an electric car for you, following a change in last October’s budget. The change also means that an employer can avoid employer’s PRSI on the vehicle, provided that it is an electric one, such as a Nissan Leaf or Tesla.
This means for example, that if your employer were to buy you a new Tesla (if they could track one down) retailing at about €100,000, typically you would have to pay tax on €33,000 of the value, or €17,160 a year based on the top rate of 52 per cent. With the new scheme, however, this €17,000 stays in your pocket.
Moreover, employees can also avoid BIK on the cost of fuel for their electric vehicles, by charging them through a company-owned charge point. However, O’Brien notes he has yet to see a swarm of employers consider the new scheme,
“The act still only provides for a one-year exemption,” he says, noting that while the Minister for Finance Paschal Donohoe has committed to extending it for three-five years, it is still “a risk”.
Another way to pay less tax is to opt for an older model.
“It’s based on the original market value of the car, so if you had a Ford Capri purchased for £1,000 in the 1970s, you’d only be paying tax on 30 per cent of that,” notes Brendan Allen of Kildare based accountants Allen Morrissey.
While there is legislation on the statute books which provides for the imposition of BIK on a car-parking space in your place of work, it has not been introduced, and tax experts are on the fence as to whether it will be. Parking has been a key perk for many public-sector staff, in particular.
But even so, it doesn’t mean that all car parking is BIK exempt. As Allen notes, if your employer pays for you to feed the meter or for a car park outside your place of work, then BIK arises.
If you’re lucky enough to have health insurance offered by your employer, you may believe that the cost of having protection in place for you and your family would be zero. However, you would be wrong.
For example, if your employer pays a premium of €1,000 for you, and you make a contribution of €300 towards the policy, the net benefit to you is €700 – so the tax owed is €364, if you’re subject to tax at the higher rate. However, as you are also entitled to tax credit on the gross cost of the premium at 20 per cent, it reduces the tax bill to you to €291.20. If you do receive health insurance through your employer, make sure you’re claiming this 20 per cent credit – it will show up as one of your tax credits on your P2 form.
In the current tight rental market, many employers are offering free accommodation, at least for a limited period, to help their staff get up and running in the capital. But new employees need to remember that the gesture, while generous, is not exactly “free” as it will also incur a BIK charge – which means the full gamut of taxes.
The tax applies regardless of whether the employer owns a property, which is used by employees, or if it rents a property on behalf of its staff members. In the latter case, the portion liable for BIK will be the market rate of the rent, minus any contributions made by the employee.
However, for employees relocating from elsewhere, BIK can be avoided if the employer follows Revenue guidelines for relocation packages.
The Exemptions: Bikes, bus tickets and Christmas vouchers A number of benefits are thankfully exempt from tax. If you received a bonus of €500 or less in vouchers for Christmas for example, you won’t have paid tax on this, as such benefits are tax free.
If you buy a monthly or annual bus or train ticket through your employer, BIK also doesn’t apply.
Other exemptions include the Cycle to Work scheme, certain share and approved profit sharing schemes, discounted or free food in your canteen, some accommodation provision, lump sum and certain redundancy payments.
In addition, if your employer pays for the use of your mobile phone, or offers you the use of a laptop or other electrical devices, such as a television, BIK won’t apply, provided that “private use is minimal”.
Car parking is another benefit which isn’t subject to tax, as are social events such as a Christmas party, or group meal.
It magazines or newspapers are needed for your job, they too fall outside the remit of benefit in kind.