How staff perks and expenses could land you with tax bill
Benefits could trigger a tax liability and take a big chunk out of your take-home pay
On-the-job perks are a boon for many of today's workers. In a bid to attract and hold onto skilled staff, employers are increasingly offering workers a range of perks - such as gym membership, on-site massages, yoga classes, private health insurance and free food. There is a downside however: such perks may trigger a tax bill for workers and in turn, take a big chunk out of their take-home pay.
"Non-cash remuneration - such as company cars, loans from employers and medical insurance - often generate a tax liability for employees," said Norah Collender, tax technical manager with Chartered Accountants Ireland. "Non-cash remuneration is usually treated as a notional benefit for tax purposes - and could have an impact on an employee's net take-home pay. So it's important for employees to understand that there is often a tax cost with non-cash remuneration and to know how acceptance of such a perk could impact their take-home pay. Such perks can be a way to get something for less than what you would pay for it normally. However, it's worth bearing in mind that there may be a more tax-efficient way of getting a perk from your employer."
Tax on perks
On-the-job perks are known as benefit-in-kind (BIK) - and as these benefits have a monetary value, they must usually be treated as taxable income. Income tax, PRSI and the Universal Social Charge (USC) must typically be paid on the value of the benefit - if it's a taxable benefit. It is up to your employer to make the arrangements to ensure you pay the correct BIK tax - if you're getting perks which are liable for the tax.
There are some perks which are not taxable - such as gyms or free or subsidised canteen meals (where they are available to all staff), car parking, employer pension contributions, an annual gift voucher up to the value of €500, and free or subsidised accommodation (where your job requires you to live in the accommodation).
However, there are rules around these tax exemptions which could catch workers out. For example, although canteen food is tax-free (if provided to all employees), meal vouchers are taxable. Should an employer only provide some employees with access to a gym - or pay gym subscription fees for certain employees - those workers must pay tax on that benefit. Caretakers and prison chaplains are exempt from tax if getting free or subsidised accommodation from their employer - as long as they need to live on the premises to conduct their work duties. Other employees who are simply getting free or subsidised use of an apartment owned by their employer, but who don't need to live there for their job, will be taxed on the benefit.
Company shares are often offered by employers - particularly multinationals. This perk could come in the form of free or discounted company shares - or the ability to buy shares through an employee share scheme, such as a share option scheme. It's important to understand any tax obligations which arise after taking up an employer's offer of shares - and who is responsible for fulfilling those obligations.
Should you get free shares from your employer as a once-off award, these shares are typically viewed as BIK and income tax, PRSI and the USC must usually be paid on those shares through the PAYE system.
The tax rules around employee share schemes are complicated and vary, depending on the type of scheme. Many companies run share option schemes (often referred to as unapproved share option schemes) for their employees. With these schemes, employees are offered the chance to buy shares in the future - at a set price or indeed for free. If the share price goes up, a significant gain could be made by the employee - and so, share option schemes can be lucrative. However, an employee's tax responsibilities also increase when they join such schemes.
There are three tax bills which typically arise with share option schemes.
The first can arise when the option to have the right to buy shares is granted. "Let's say there's a share remuneration scheme in your work and your employer asks you if you want the option to buy shares under that scheme at a future date and time," said Collender. "You accept and the option [to have the right to buy shares] is granted. If you have more than seven years to exercise the option [that is, to take up the right to buy shares] and if the option price [the price the employee has to pay for the shares] is less than the market value of the shares at the date the option was granted, there's a tax liability (income tax, PRSI and USC) for the employee on the difference."
Your employer should make the arrangements to pay this tax for you. (You should not be liable for this tax if you do not have more than seven years to exercise the share option.)
The second tax bill arises when you exercise your option (take up your right) to buy shares.
"If there's a difference between the market value of the shares at the date you exercise your option [the date you take up the right to buy the shares] - and the value of the shares that you were entitled to buy them at, you must pay tax on the difference," said Collender. That difference is known as the share option gain. "The difference is liable to income tax, PRSI and the USC - and it is up to the employee to make arrangements to pay the tax in this instance," said Collender.
So for example, let's say the market value of the shares at the date you exercise your option was €1500 - and you were entitled to buy the shares at a price of €1000, you must pay tax on the difference of €500 (which is essentially a paper profit).
You must also file a return for that difference - using the RTSO1 form. That return must be made - and the tax (known as Relevant Tax on Share Options) must be paid - within 30 days of exercising the option. Bear in mind that you should be entitled to a credit at that stage for any tax paid when initially granted the option.
Filing an RTSO1 return brings employees into the self-assessment tax system. "Employees are therefore then obliged to file an income tax return for the year, including their PAYE income, though they'll get a credit for any tax already paid," said Collender. "So exercising a share option leads to an increased level of tax responsibility for an employee."
The third tax bill arises when you sell the shares (assuming you make a profit). At that stage, the employee must pay any Capital Gains Tax (CGT) on any chargeable gain made on the sale of the shares.
There are a number of tax efficient Revenue-approved share schemes where the tax burden on employees is typically lower than it is on other schemes. With some Revenue-approved schemes, you can get tax-free shares from your employer - as long as certain conditions are met. With others, the tax treatment of any gains made on the shares is more favourable. For example, with the Key Employee Engagement Programme (Keep), employees should not have to pay any income tax, USC or PRSI on any income gain made on the exercise of a share option. So should you have the choice between a Revenue-approved share scheme and a non-approved share scheme, seriously consider the more tax-efficient scheme.
Before partaking in an employee share scheme, remember there's no guarantee that you'll make money on the company's shares - indeed, you could lose money.
"Always consider if there's value in taking up a employee share remuneration scheme," said Collender. "Sit back and make a commercial decision. Do you think your employer - and therefore its shares - will perform well? Do you see a ready market for your shares - that is, will you be able to sell them on when you want to? Do the terms and conditions of the scheme suit you -do you have to hold onto the shares for a certain amount of time and does it make sense to you to hold onto them for that time? Also, can you afford to forsake some of your salary in exchange for shares and can you afford the risk of holding shares - as share remuneration schemes are often offered as an alternative to additional pay."
Furthermore, before taking up an employer's offer of company shares, or indeed any job perk, know exactly where you will stand with tax. Be sure too that you really want and will regularly use the perk, particularly if it will trigger a tax bill.
Sunday Indo Business