Benefit in kind: Be careful those office perks don’t come back to bite you in tax

Perks of the job have been in the headlines for all the wrong reasons recently but they are a reality for large chunks of the Irish workforce. Whether it is a contribution to your private health insurance, gym membership or a company car, these are all non-cash benefits which have a value to the employee. And, for that reason, the Revenue Commissioners see them as taxable.

Understanding the tax position is critical when you are considering remuneration packages that include such add ons. Benefits that might seem valuable up front can come with significant tax implications that might make them suddenly less attractive. One case in point which we will look at in more detail is the revised regime of benefit in kind (BIK) on company cars which has caused considerable consternation at companies across the State this year.

There can be important differences in treatment depending on whether the perk is available in your office or elsewhere and also whether it is available only to some staff or to all of them.

What perks are considered benefits in kind?

Take things as simple as meal perks or gym membership. If these are provided on site and are available to all staff they are not considered to be benefits for the purposes of taxation. If, however, only certain staff have access, then it is seen as a benefit in kind. Similarly, if the company pays for membership to an external gym, it will be treated as benefit in kind while restaurant or holiday vouchers will be taxed on their cash value.

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The same BIK rules will apply, for instance to private medical insurance if your company is paying some or all of the premiums on your behalf.

People moving to jobs – either into the State or up from the country – can sometimes be offered temporary accommodation while they get sorted and this too is taxable as BIK.

For benefit in kind, you will be liable to income tax, PRSI and universal social charge (USC). And if it is something like a gym membership where the company pays a lump sum to a venue for a group of employees, that cost is divided equally among all those staff to determine the specific value of the benefit to them.

For most people, when we think of BIK, it relates to a company car – long cherished as one of the more valuable perks of the job as well as a sign of relative status in the workplace. The key point here is that any vehicle is available for private use, not purely for work – a distinction that absolves people using company vans or other vehicles in their job.

Figuring out your tax liability on a company used to be fairly straightforward. You were charged a percentage of the vehicles open market value (OMV), which was the price of the car including VAT and VRT – generally the list price – before it was first registered, not when you personally got use of it.

So, as you can see below, if you had a car worth €35,000 and clocked up 45,000 kilometres a year, you would be assessed as having a BIK of €4,200 (€35,000 * 12 per cent) and you would be taxed on this sum at your marginal income tax rate, plus PRSI and USC. SO that could be a tax bill of up to €2,184.

How do I calculate benefit-in-kind tax for a company car?

But a new regime was put in place this year as part of the Government’s climate action plan. This adds a layer of complexity to the calculation – and also a higher charge – as the Government looks to incentivise lower-emission vehicles and a general reduction in private motor usage.

The new system effectively adjusts the percentage of the OMV that you will be charged based on the emissions of the vehicle – the lower the emissions, the lower the charge.

Going back to our example of the €35,000 car doing 45,000 kilometres a year, we can see (below) that if the car falls into category C with emissions of between 99 and 139 grammes per kilometre, your benefit will be assessed as 18 per cent of the vehicle’s original cost, or €6,300 (€35,000 * 18 per cent). Your tax on this could be as high as €3,276 if you pay income tax at the higher rate.

If your car is a more climate friendly Category A, vehicle, the BIK would be €4,725 but if it falls into category E, the BIK would be as high as €7,875. As you can see, regardless of the emissions, you will be paying more for your company car this year than you would up to now. And, as with the old system, the lower the annual mileage, the more expensive the perk is to you (although a further 20 per cent discount) is available to drivers with very low mileage under certain circumstances). The BIK could be as high as 37.5 per cent of the car value if you have low mileage and a “dirty” engine.

Unusually with such a change in taxation, the rules are retrospective in that they do not apply only to people receiving a new company car from this year on. If you received a company car before this year under the old regime and still use it, you will be taxed under the new regime from this year on.

Unsurprisingly, there was outrage when the new rules came into force, notwithstanding that they had been signalled as far back as 2019, as people with typical company cars found themselves with substantially higher tax bills.

Under intense lobbying, the Government backed down partially – for this year at any rate. In March, the announced that a special discount on the OMV of €10,000 would be put in place for this year to calculate your BIK for vehicles in categories A-D. The least environmentally-friendly cars – those in category E – got no such respite.

They also lowered the limit at which drivers of company cars could enter the most beneficial tax assessment by temporarily lowering the entry point to the highest mileage band to €48,001 from €52,001.

So, for this year, going back to our example, our category C company car worth with an original OMV of €35,000 and doing 45,000 kilometres a year will be assessed as yielding BIK this year of €4,500 (€35,000 – €10,000 = €25,000 * 18 per cent = €4,500). That’s much closer to the €4,200 BIK assessed under the old regime and well short of the €6,300 you were facing under the original structure.

If your car is a more climate friendly Category A, vehicle, the 2023 BIK would now be €3,375 (down from €4,725) but if it falls into category E, the BIK would still be €7,875.

It remains to be seen whether the amended regime continues into next year or whether they move back to the original proposal or introduce additional phasing in.

There were also changes made to the regime for fully electric vehicles (by definition not including hybrids). The discount to the OMV of €50,000 was reduced to €35,000 under the new rules for 2023, a figure that is due to fall to €20,000 next year and €10,000 in 2025, significantly increasing the BIK applying to electric vehicles.

The amendments announced in March, saw electric vehicles also benefit from the extra €10,000 discount against OMV, so you now deduct €45,000 from the vehicle’s original price. The figures for next year and beyond remains as they were, for now.

That aside, the process for calculating BIK is the same.

Leaving company cars to one side, it is worth noting that an exception to the general rule that workplace benefits are taxed is what is called the Small Benefit Exemption. This allows an employer to give staff what Revenue describes as a “voucher or other tangible non-cash benefit” up to a certain value free of tax. The key thing here is that the voucher cannot be transferable into cash and cannot be part of a salary sacrifice arrangement. It must be on top of salary and exchangeable only for goods and services.

Up to 2015, the amount was capped at €250 but it was doubled that year to €500 which had to be given in one go in any given year. In last year’s budget, the limit was doubled again to €1,000 and it can now be broken up into two vouchers in any tax year and is used increasingly by companies to reward staff in good years with an effective end year tax efficient bonus that does not create ongoing commitments on payroll.

You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.