Employers can make substantial savings on income tax and national insurance contributions through voucher schemes. Andrew Johnson of the UK Gift Card and Voucher Association (UKGCVA) explains how.
Voucher schemes can be an excellent motivation tool, but they will attract income tax and national insurance contributions (NICs).
However, when an employer can buy vouchers at a discount, there are savings to be made – depending on the nature of the voucher scheme.
The taxable value of a voucher depends on whether it is a cash voucher or a non-cash voucher, the latter being the type most commonly awarded through employer motivation schemes.
A non-cash voucher can be exchanged for goods or services, and the cash value of it is substantially less than its cost.
Non-cash vouchers are treated as benefits in kind, so income tax and NICs are due on the taxable value of the vouchers given to any director or employee earning more than £8,500 per annum.
The taxable value is the lesser of the cost of the voucher or its face value. So, where the employer purchases the voucher at a discount, only the discounted value is subject to tax and NICs.
For example, if an employer gives a £100 gift voucher to an employee which it only paid £95 for, then the amount liable for tax and NICs is £95.
In contrast, a cash voucher can be exchanged for a sum of money greater than, equal to, or not substantially less than the cost of providing the voucher.
Cash vouchers are taxed in full in the same way as regular pay. Income tax and employee NICs are due on the face value of the voucher, regardless of the cost to the employer, and must be accounted for through the PAYE system.
So if, for example, the employer provides an employee with a voucher that costs £40 to buy, but which can be redeemed for £50 cash, the amount chargeable to tax and liable for NICs is £50 – as this is a cash voucher. This should be accounted for through the PAYE system.
As with all benefits, the employer is obliged to account for tax and NICs on the payroll and record the benefits given to each employee on separate P11D forms, unless they set up a PAYE Settlement Agreement (PSA) or Taxed Award Scheme (TAS).
However, using a P11D still leaves the recipient of the benefit liable for tax and employee NICs, and when HM Revenue and Customs (HMRC) claims these back it can diminish any motivational effect.
For this reason, it is often better to deliver employee benefits free of all tax and NICs to the recipient by arranging a PSA with your local HMRC office. This is an annual agreement negotiated between the employer and the local tax office under which the employer pays all due tax and NICs, and is responsible for keeping a record of taxable benefits.
This record should note the benefits as well as the sums spent, but does not need to detail which benefits go to which employee as would a P11D.
Under a PSA, employee NICs are not due. However, it is up to the employer to ensure that the remaining tax and employer NICs are paid at the appropriate rate. All costs due under a PSA are payable before 19 October after the end of the financial year to which the PSA applies. If 19 October falls on a weekend or bank holiday, payments must arrive no later than the last working day before 19 October.