As the year ends, the lead-up to the holidays is hectic for employers as they juggle holiday pay, Christmas bonuses, and annual leave. Christmas bonuses put a smile on your employee’s faces and are a way of saying thank you for their hard work and dedication.
While many employers are excited to give employees perks of monetary value or gifts, they are treated as taxable income since they are a benefit-in-kind. The gift will be significantly reduced when you deduct the income tax, PRSI and universal social charge (USC). But, there is a way you can gift your workers up to €1,000 per year without deducting taxes. Using the Small Benefit Exemption Scheme to give a bonus or holiday gifts excludes the monetary perks from PAYE and other deductions.
If you haven’t used the Small Benefit Exemption Scheme, discover the benefits rules and the recent changes to the scheme that can benefit your business.
The Background of Small Benefit Exemption
Small Benefit Exemption was introduced in 2004 as a Revenue concession before moving into legislation in budget 2016 when it was increased from €250 to €500. The exemption is with respect to the rewards and gifts given to employees and the tax deductions applied to them. Under the Revenue Commissioner’s approved scheme, employers can provide non-cash gifts to employees not subject to income tax or other mandatory payroll deductions like PRSI and USC.
Initially, Small Benefit Exemption allowed employers to reward part-time and full-time workers with gifts of up to €500. However, in the 2023 Budget read in September 2022, the limit was increased to €1,000. With the changes taking effect immediately, you can use the new limit for 2022 bonuses and gifts.
What makes the scheme beneficial is that you can give two tax-free rewards to an employee, provided you stay within the limit. Imagine if you had to give a bonus to an employee through the payroll system. Depending on their tax bracket, you must match the bonus with hundreds of euros in payroll taxes. That means your generous gesture will cost more than you thought. With the Small Benefits Exemption Scheme, you don’t have to pay an extra euro for the gift. Let’s check out the scheme’s rules and the gifts you can give your employees.
Tax-Free Gifts for Employees and Directors
Under Small Benefit Exemption, you can gift employees and directors a non-cash bonus of up to €1,000 annually. Since the gifts and bonuses cannot be paid in cash, you can avail the tax-free gifts through vouchers, including gift cards, department store or grocery store vouchers, gym memberships, tickets and tangible gifts like homeware, electrical items and jewellery. With the Small Benefit Exemption limit changes, you can give two benefits per year. For instance, you can mix tangible gifts with tickets or vouchers, giving you an added opportunity to reward your employees.
You won’t have to handle any paperwork or tax-related transactions when availing the gifts or bonuses. You get an invoice for the tangible gifts or vouchers you bought and treat it as a deductible business expense in accounting. You don’t need to adjust the payroll or make statutory remittances.
Small Benefit Exemption Scheme Rules
The Small Benefit Exemption Scheme has stringent rules to guide employers on tax exemption. Some of the rules include the following:
• The gifts or vouchers must be purchased with company funds: For the tax-free rewards to be treated as deductible expenses, they must be purchased using a business bank account or credit card. Whether you buy concert tickets, gym memberships, gift vouchers or tangible items, you must pay using the business account. A director or an employee cannot purchase the gifts and seek reimbursement from the company.
• A maximum of two benefits a year: You can only avail bonuses and rewards through the Small Benefits Exemption Scheme twice a year. That means an employee can only receive two tax-free vouchers in any year even if you don’t avail the maximum allowance of €1,000. If you avail the third voucher or gift, only the first two get tax-free status, and you have to pay taxes for the third.
• Non-cash benefits only: You can only provide gifts in non-cash formats like spa treatment vouchers, gym memberships or tangible items like jewellery. If you buy a gift voucher for your employees, it cannot be converted into cash.
• Gifts cannot be offered as a salary sacrifice: You cannot give a tax-free gift card or bonus as part of a salary sacrifice scheme where a worker forgoes part of their salary to receive the gift. You cannot fund the gifts from a reduction of the employee’s salary. That is why the business receives an invoice for the rewards and pays it externally to payroll.
• The gift should not exceed €1000: Your gifts and bonuses should not exceed the maximum threshold. Any amount above €1,000 is subject to tax at marginal income tax rates.
• Employees must be on the payroll: When issuing tax-free vouchers, the employees receiving the gifts should be on your payroll. Part-time and full-time employees can be given vouchers and rewards from the scheme, but contractors are not allowed.
• Unused allowance cannot be carried over: If you do not gift employees during holidays, you cannot carry over the tax-free benefits to the next tax year.
How Do Employers Operate the Small Benefit Exemption Scheme?
The Small benefit Exemption Scheme is straightforward, and employers can use it from the 2022 tax year. You don’t need to adjust your payroll or file returns. The scheme is as simple as purchasing vouchers and paying them from the business account. You will enter it as a non-taxable benefit in your accounting system and treat the invoice as a deductible expense. When the business books are audited, the accounts should show the invoice amount using the exemption. The figure should not exceed €1,000 for each employee.
With the scheme, you can incentivise and reward employees voluntarily. The scheme is open to any employer and completely voluntary. That means you can offer the benefit one year and not the next. The scheme provides various advantages to employers aside from being tax-free. For instance, you can use vouchers and gifts to promote employees’ well-being by helping them access wellness programmes. Buying your employees tickets to their favourite concert is also an excellent way to boost morale.
Does the Small Benefit Exemption Scheme Benefit Employees?
All company employees benefit from the Small Benefit Exemption Scheme whether they work full-time or part-time. The only condition is that they have to be on the business payroll, and their salary is subject to PAYE, PRSI and USC. Employees receiving bonuses and gifts through the Small Benefit Exemption Scheme save in taxes depending on their marginal tax rate and the amount of USC and PRSI they pay. That means they can use the full value of the bonus as they wish.
There is no limit to the employees a business can reward through the exemption scheme. Besides, employers are open to the non-cash gifts they can award employees. Hence, employees can benefit from wellness programmes funded by the employer through gym membership vouchers and spa treatments.
The increased limit of the Small Benefit Exemption Scheme allows you to appreciate employees for their dedication twice a year. You can provide non-cash benefits as an end-of-year bonus or as a Christmas gift. Whichever way you choose to utilise the small benefit tax exemption, it provides considerable savings for you and your employees.
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