Under this exemption, if an employer provides a benefit to its employees, the benefit is exempt from tax and National Insurance Contributions, if all the following conditions are satisfied:
Also, if the cost of the benefit exceeds £50, the whole amount will be required to be included on a P11D or taxed through the payroll, rather than just the excess, otherwise if the benefits meet the conditions for the exemption, they will be exempt from tax and NIC and will no longer need to be reported on the employee’s P11D or taxed through the payroll.
Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household) the exemption is capped at a total cost of £300 in the tax year.
This means that the total cost of separate trivial benefits provided by the company that are exempt from tax is limited to a maximum of £300 in any tax year. This is known as the annual exempt amount. Where the company provides benefits that it considers are trivial, it will need to keep suitable records to demonstrate that this amount has not been exceeded.
Per HMRC’s guidance, some types of examples of trivial benefits are:
The below examples given in the HMRC guidance are helpful.
Employer A takes a group of employees out for a meal to celebrate a number of birthdays. Five employees attend the meal at a total cost to employer A of £240. Individual employees make different menu and drink selections. Rather than undertake a detailed analysis of the bill you should accept that the cost per head is £48, reflecting an average amount of £240/5. The benefit of the meal can be covered by the exemption since the cost for each individual does not exceed the trivial benefit financial limit.
Employer D provides each of its employees with a bottle of wine costing £25 at Christmas. However, as an alternative, it provides employees who do not drink alcohol with a £25 gift voucher for a national supermarket chain which they can exchange for an alternative non-alcoholic Christmas gift. Both the bottle of wine and the non-cash gift voucher can be covered by the exemption.
Company I provides a director with 3 benefits that cost £30, £40 and £50 respectively in a single tax year. The total cost of the benefits is £120. The total cost does not exceed the annual exempt amount of £300 and all of the benefits can be covered by the exemption.
Company J provides a director with 7 benefits that each cost £50 each during the tax year. The total cost is £350 which exceeds the annual exempt amount. The last benefit is not exempt from tax.
Company K provides a director with 8 benefits in the tax year. The first 5 benefits during the tax year cost £50 each. In date order, the next cost £40, £45 and £10 respectively. The total cost of the first 6 benefits is £290 which is less than the annual exempt amount so they are all exempt. The £45 benefit brings the total cost to £335 which exceeds the annual exempt amount. Therefore, the £45 benefit is not exempt, but is not counted towards the annual exempt amount. The £10 benefit brings the total cost to £300 which does not exceed the annual exempt amount so it is also exempt.
Company O gives bottles of wine each costing £30 to a director, to his wife who is a former director, and to their daughter on their birthdays. The daughter is not an employee or office holder of Company O, so the cost of her bottle of wine is apportioned between her father (a current director) and her mother (a former director). In respect of the daughter’s gift, £15 (£30/2) is allocated against the father’s annual exempt amount. The balance is allocated against the mother’s annual exempt amount under the employer-financed retirement benefits (EFRBS) regulations (The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes)(Amendment ) Regulations 2016).
For further details please refer to HMRC’s guidance.