What are trivial benefits?
Trivial benefits were introduced in legislation in 2016, which aimed to provide clarity on what small benefits are defined to be trivial and therefore exempt from tax and reporting obligations.
With a little planning, we are therefore able to take advantage of this exemption to provide employees and directors with tax efficient benefits – often for expenditure you would’ve incurred anyway.
What criteria does a trivial benefit have to meet?
A “trivial benefit” is best described as small “token gifts” given by a company to its employees and/or directors (or a member of their family or household). Examples of trivial benefits could include a birthday present on an employee’s birthday, a pizza in the office on a Friday, flowers on the birth of a new baby – basically most expenses could be classed as a “trivial benefit” as long as it meets the following criteria;
- Costs £50 or less to provide (including VAT)
- Isn’t cash or a voucher which can be redeemed for cash
- Isn’t a reward for work or performance
- Is not a contractual payment as part of the terms of an employee’s contract
Where one or more of the conditions are not met, the benefit is taxed in the normal way, through a P11D or taxed through the payroll.
How does this work with directors?
For small owner managed business (“close companies” – a limited company ran by 5 or fewer shareholders) – trivial benefits work the same way for directors as they do for employees. For the vast majority of our clients, this would be the case.
However, there is a cap on the total trivial benefits a director (or a member of their family or household) can receive from a company. This is a cap of £300 in each tax year (6 April – 5 March). Therefore, given that the maximum trivial benefit amount is £50, this represents 6 x £50 trivial benefits allowed, per director, per tax year.
How does this work in practice?
As discussed above, there is a lot which can be considered a trivial benefit. However, for directors who are looking to maximise tax efficiency, the cleanest and simplest way to achieve this would be to purchase a £50 Amazon (or similar) vouchers for themselves every 2 months through the company.
This would lead to receiving the maximum £300 tax exempt benefit each year, and they then have £300 worth of vouchers that they can use to buy whatever they like, separate to the company.
It doesn’t just have to be Amazon vouchers either, it can be other gift vouchers or other token benefits, provided it is a maximum of £50 a time and it is not redeemable for cash.
Remember, this is per director. So if you have three directors, each director can benefit from a £50 voucher (or similar) every two months, up to a maximum of £300 per director per tax year.
How does this benefit me? How much tax could I save?
We have established that each director can receive a maximum of £300 in a tax year (£50 x 6) from a company, this is not liable to personal tax on the director, and the company is able to claim this as a tax-deductible expense. This therefore creates a tax mismatch which can be utilised to generate tax savings.
Companies pay corporation tax at 19%, so if £300 worth of benefits was being given to a director, the cost to the company is (£300 x 81%) = £243. There is no personal tax or NI to be assessed on a director, so there is £57 of tax savings being made.
This £57 tax saving is per director, so if your company had two directors, this represents £114 of tax savings, and so on.
What about employees? How does this work with my employees?
The only difference when looking at employees instead of directors is the £300 annual limit cap does not apply to employees, so provided a trivial benefit meets the criteria listed above – it is exempt from tax or reporting obligations.
So, if you took your employees out for a meal, as long as it was for less than £50 per head, the entire meal would be classed as a trivial benefit.
How does this work with the Annual Event Exemption?
The annual event exemption (£150 exemption per head, covers events such as Christmas parties) is separate to the trivial benefit allowance. This will be covered in a future post, but does not need to be considered when considering trivial benefits as the two exemptions run separately from each other.
To conclude, trivial benefits are a great way to maximise tax efficiency and reward employees and company Directors.
If you are still unsure, please contact us if you would like to maximise your tax efficiency and take advantage of this exemption.