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Understanding Employee Benefits

By: J.A.J Aaronson - Updated: 7 Jul 2012 | comments*Discuss
Employee Benefits Employer Kind Tax

Employee benefits are becoming an increasingly important element of any remuneration package. While some employees concentrate solely on the headline salary when looking for a new job, others also consider the non-salary benefits on offer. These benefits form a fundamental part of an employee’s compensation.

Employee benefits have come under the spotlight in recent months. Many employers found themselves strapped for cash as a result of the downturn, but still wished to attract and maintain the best possible workforce. As a result, many turned to employee benefits as a way of enticing talent.

What Benefits Might I be Offered?

Benefits will differ from employer to employer. Amongst the most popular are company cars, private medical insurance, gym membership and extended holiday time.

Many employers are broadening their horizons when it comes to employee benefits. Indeed, some are actually trying to change employee behaviour through innovative, interesting benefits. For example, an increasing number of firms are offering interest free loans to employees who wish to purchase a bike to cycle to work. These loans are paid back over a period of months, direct from the employees’ pay packets.

What is Salary Sacrifice?

Some benefits are offered on a ‘salary sacrifice’ basis. This means that the employee agrees to give up part of their salary, in exchange for the benefit.

Benefits are valued, and the corresponding amount will be deducted from the headline salary. There are several reasons why you might choose to do this. The most important reason is to reduce your tax burden. Salary sacrifice is often used to bring down an employee’s taxable income, particularly when it can bring them into a lower tax bracket.

Many employees choose to contribute to a pension on a salary sacrifice basis. This will reduce their taxable income – but their take-home pay remains the same, as they would have been contributing to a pension anyway.

How Are Benefits Taxed?

The tax treatment of employee benefits differs from benefit to benefit. Some are taxable, and others are not.

Benefits on which you will not pay tax include employer pension contributions, public transport subsidies, childcare assistance, gym membership, and loans with a value of less than £5,000.

Taxable benefits include the private use of a company car (that is, non-work use, including travel to and from the office), loans with a value of £5,000 or more, and health and life insurance.

It is important to remember, though, that benefits are only taxed if your total annual pay (including taxable benefits) exceeds £8,500. This can be very important for part-time employees, as it can significantly reduce their total tax burden.

When considering employment opportunities, you should look at the total remuneration package on offer – not just the headline salary. Think about the benefits being provided by the employer. Would you be spending money on these anyway? If so, it may be in your financial interest to settle for a lower salary for tax reasons.

You should also remember, though, that some employers sadly try to talk up their benefits package in the hope of enticing employees into accepting lower salaries. Make sure that you do not sacrifice salary in exchange for benefits that you are not going to use.

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