If you read nothing else, read this …
• Private medical insurance, dental plans, optical benefits and health cash plans are taxable perks.
• If the employer pays for any of these on the employee’s behalf, the employee does not pay national insurance (NI) on it, and the employer pays Class 1A NI on its value.
• Tax-efficient benefits offered via salary sacrifice result in tax and NI savings.
• Benefit-in-kind tax is based on whether a scheme is self-administered or insured.
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Employers can save money if they get to grips with the tax and national insurance liabilities involved in providing health and wellbeing benefits, says Jennifer Paterson
One of the top objectives for employers providing healthcare perks is to control costs, according to the Employee Benefits/Pruhealth healthcare research 2011, published in June.
Offering tax-efficient benefits is one way to do this. Paying tax on a benefit increases its cost significantly, so both employers and staff benefit from tax-efficient arrangements.
Aviva’s Health of the workplace report, published in September 2011, found that 36% of employers would be encouraged to implement health and wellbeing initiatives if there were tax incentives. Most healthcare benefits are tax-efficient to a degree from an employer’s perspective because the cost comes out of its expenditure before tax.
Benefits such as private medical insurance (PMI), dental plans, optical perks and health cash plans, where these are offered to staff as well as their partners and families, are all taxable. If an employer pays for a benefit on the employee’s behalf, it pays Class 1A national insurance (NI) on the value of the benefit but the employee does not pay NI.
Employer-provided annual health screening and medical checks, meanwhile, are not a taxable benefit when offered to employees. However, health screening is treated as a taxable benefit, with Class 1A NI for the employer, when it is provided for dependents.
Some wellbeing perks are also exempt from tax. Employee-only gyms, exercise classes and other recreational facilities available to staff generally are exempt. But the cost of gym membership to facilities that are also open to the public are not.
Employee assistance programmes
The tax treatment of some other healthcare benefits is not as clear cut. Employee assistance programmes (EAPs), for example, continue to be a grey area. In March 2011, the Office of Tax Simplification recommended that the tax relief on EAPs should be abolished in its Review of tax reliefs report. However, no action has yet been taken around this recommendation.
Eugene Farrell, immediate past chairman of the UK Employee Assistance Professionals Association (EAPA) and business manager at Axa Icas, says: “[Prior to this] the most recent guidance on the tax treatment of EAPs was in 2008. This advice, developed by HM Revenue and Customs (HMRC) in conjunction with the UK EAPA, sought to address the ambiguity relating to how legal and financial information can be delivered within an EAP if the scheme is to remain exempt.”
The issue of dependants and EAPs has also caused confusion. HMRC views EAPs as tax exempt where these are provided to employees only. If this is the case, the following guidelines apply: there must not be a separate helpline number for dependants; couples or family counselling will not prevent the tax exemption from applying, but a dependant must not be offered face-to-face counselling on their own; and dependants must not be given access to the legal information component of the service.
Another issue for EAPs, where these are provided via a helpline or call centre, is the difficulty of knowing which employees have used the service. Alastair Kendrick, tax director at MacIntyre Hudson, says: “If the cost is incurred on a usage basis, is it possible to attribute to particular employees or is it borne across the whole organisation?
There has been a bit of a ding-dong with HMRC over the years. [It has] said employers must know who has benefited, and employers are saying they do not know.”
More generally, how employers operate healthcare schemes will also determine how benefit-in-kind tax is calculated. For instance, some schemes are run on a set premium, with the organisation paying a provider a fixed amount annually for healthcare cover. Alternatively, employers can opt to self-insure schemes, either fully or partly.
In an insured scheme, the employer uses a provider to cover staff at a flat rate per person. In a self-insured scheme, the employer bears the risk while paying the cost of medical treatment for staff. For example instead of paying, say, £1,000 per employee, it would pay the treatment costs plus an administration fee charged by the provider. Kendrick says: “If an employer has 1,000 employees and is paying £1,000 on an insured scheme, it has got to compare that with perhaps only three employees needing major surgery in a year, and weigh that as the cheaper option. It all comes down to how much risk the employer wants to take.”
Who benefits are offered to and how they are provided may also impact on their tax and NI treatment. For example, there may be differences between some employer-paid products for employees, and add-ons for family members, or where benefits are offered via a salary sacrifice arrangement. Kendrick says: “It is quite common in a flexible benefits plan to have the option of taking PMI for partners and children under the age of 18 [via salary sacrifice], but there is no tax issue because the employee takes a sacrifice in lieu of the premium.”
The tax and NI savings available via salary sacrifice are the reason some healthcare benefits are provided this way. Mike Blake, compliance director at PMI Health Group, says: “Health screening is being done a bit more on that basis now. If an employer is doing salary sacrifice, generally it is finding a way to pay for benefits out of gross salary, and there will be different tax treatments.”
Tax and national insurance status
• Private medical insurance when offered to employees, partners and family.
• Dental insurance when offered to employees, partners and family.
• Optical insurance when offered to employees, partners and family.
• Health cash plans.
• Health screening when provided for partners or family.
National insurance (NI) payable
• Private medical insurance: employer pays Class 1A national insurance if it pays for the benefit.
• Dental insurance: employer pays Class 1A national insurance if it pays for the benefit.
• Optical benefits: employer pays Class 1A national insurance if it pays for the benefit.
• Health screening when provided for partners or family.
Tax and/or national insurance-free
• Employee assistance programmes (EAPs) are currently exempt from tax if they meet certain criteria. However, in March, the Office of Tax Simplification recommended that the tax relief on EAPs should be abolished although no action around this has yet been taken.
• Health cash plans have no impact on national insurance (NI).
• Employer-paid health screening for employees: if offered on an annual basis, this is not a taxable benefit.
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