Have a Happy Tax Free Christmas Bonus!
It’s that time of the year again when employers are considering rewarding staff for all their hard work throughout the year. For SME’s this can be a costly exercise, and so if it can be done in a tax efficient manner all the better!
Tax Free Gift Vouchers
Under a current Irish Tax concession known as the Small Benefits Scheme, employers can now reward employees with a non-cash bonus of up to €500 in value completely tax free each year. Provided certain guidelines are followed neither the employer nor the employee will pay PAYE, PRSI or USI, potentially saving €653.65 in tax.
To qualify for the small benefits scheme exemption, only one tax-free bonus may be paid to each employee in any one year. If more than one bonus is given in a year, it is only the first one that will qualify for tax-free status, even if this bonus is less than the €500 annual allowance – any used allowance cannot be carried over. The tax-free bonus must be paid in non-cash form and it cannot be part of any pay cut arrangement between the employee and employer. It is also important to note that if the gift voucher exceeds €500 then the entire amount is taxable not just the amount in excess of the limit.
There is no paperwork and no return to be made to avail of the scheme. The employer is simply invoiced for the total value of tax free vouchers ordered. The invoice is treated as a normal tax deductible business expenses for accounting purposes, and there is no need to adjust payroll in any way – provided the above rules are followed. Business owners and directors can also benefit from the scheme.
Salary sacrifice schemes
Another option is to consider one of the various Revenue-approved salary sacrifice schemes. If you haven’t done so already, year-end bonus time is a good time to explore the options available.
The Tax Saver scheme, for example, enables employees to cut the cost of their commute by allowing their employer to pay for an annual travel pass out of their gross salary. This means that your employee will, in effect, be exempt from tax on the cost of the pass, which will reduce the cost of the pass by about 50%.
It’s quite a useful remuneration strategy in that it benefits the employer as well, because employer’s PRSI of 10.75% is not payable on the salary foregone.
For instance, the annual Dublin Bus and Luas pass costs €1,620 – but if purchased through the Tax Saver scheme staff will save €793.80 if a higher-rate tax payer, or €469.80 if taxed at the lower rate. The employer will save €174 in employers PRSI.
On that basis, a staff bonus of €2,000 used to buy a Dublin Bus and Luas pass, will result in a taxable bonus of just €380 for that employee, costing about €190 in tax if a higher-rate tax payer.
The same tax treatment applies to the Bike to Work scheme, which allows staff to pay for the cost of a new bike from their gross, rather than their after-tax, income. And if they don’t fancy cycling to work every day, the really good news is that they can avail of both the bike to work and travel saver scheme.
Please contact Robert Kelly FCA at firstname.lastname@example.org or on 01-5175211 if you would like any further information on tax efficient remuneration of staff or have any tax planning or compliance requirements. We are a firm of Chartered Accountants based in Sandyford, Dublin 18 specialising in helping SME’s with all their tax and accounting needs.
Don’t delay, contact us today.