‘Trivial’ is the new generous!
It is said ‘Every little helps’. This is a well-known saying about life, but it also applies to tax, as there is a useful and well-known exemption from an income tax charge on employment income for ‘trivial’ benefits provided by employers.
This exemption is perhaps more helpful and wide ranging than some employers and their employees might assume. For example, it applies to benefits provided to the employee or to a member of the employee’s family or household.
There are no Class 1A National Insurance contributions (NICs) on benefits which are exempt from income tax. In addition, there is an exception from Class 1 NICs for non-cash vouchers.
The small print
Perhaps unsurprisingly for such a useful exemption, there are strings attached, in the form of statutory conditions A to E (in ITEPA 2003, s 323A). Conditions A to D apply to employees, and conditions A to E apply if the employee is a director or other office holder (or family or household member) of a close company employer. Broadly, the conditions are:
As mentioned, Condition B is that the cost of providing the benefit (or the average cost per employee, if a benefit is provided to more than one employee and it is impracticable to work out the exact cost per person) is capped at ￡50.
Not so ‘trivial’!
A useful feature of the trivial benefits exemption is that this ￡50 limit applies per benefit, not per tax year. So (for example), if during the tax year 2023/24 an employer gave an employee a cinema voucher costing ￡35 on their birthday in June, and flowers and fruit when the employee was on sick leave in October, costing ￡40, and a Christmas hamper costing ￡45. The total cost of the benefits is ￡120, but all three gifts are within the trivial benefit exemption because they each cost less than ￡50.
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If the ‘cap’ fits…
For the purposes of Condition E, the individual has an available exempt amount of ￡300. Broadly, the cost of ‘eligible’ benefits (i.e., within conditions A to D) are aggregated. If the cost of an additional trivial benefit results in a total cost exceeding the annual cap of ￡300, none of the benefit that results in the cap being exceeded is exempt (see HMRC’s Employment Income Manual at EIM21869).
For example, if a close company provides a director with several benefits earlier in the tax year costing less than ￡50 each, amounting to ￡260 in total, and a further benefit is subsequently provided costing ￡50, this final benefit is not within the ￡300 annual exemption and the full ￡50 is taxable, but the earlier benefits remain exempt.
Practical point
Members of the office holder’s family or household who are employees of the close company are each subject to their own annual eligible benefits exemption cap of ￡300 (ITEPA 2003, s 323B(4)). So, there is a potential attraction in employing family members, such as adult children, all other things considered.
The above article was first published in Tax Insider (February 2023).
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