How to use the Small Benefit Exemption Scheme for your business

As Christmas approaches, you may be looking for a way to show your employees your appreciation of their hard work during the year.

You know a cash bonus would be welcome but by the time taxes including pay as you earn (PAYE) income tax, universal social charge (USC) and pay related social insurance (PRSI) are deducted, the net sum will be significantly reduced.

However, there’s another way that employers can reward their workers without incurring taxes: by giving them a bonus or gift using the Small Benefit Exemption Scheme.

If you haven’t heard of the exemption scheme, don’t worry.

In this article, we cover details of the scheme and how it can benefit your employees and your business:

• What is the Small Benefit Exemption Scheme?
• How much can employers save by using the scheme?
• How employees can benefit from the scheme
• How employers can start using the scheme
• What employers can offer their staff
• Final thoughts on the Small Benefit Exemption Scheme

What is the Small Benefit Exemption Scheme?

The Small Benefit Exemption Scheme was first introduced in the 2004 Budget.

The exemption in respect of non-cash gifts or rewards given by employers to their employees was brought into legislation with the 2016 Finance Bill and the amount was doubled from €250 to €500.

However, as part of Budget 2023, two changes were announced to the scheme:

• The benefit is now €1,000 for each employee per year, up from €500
• Employers can give their employees up to two tax-free rewards in a year, rather than one, up to the threshold of €1,000.

Niall Donnelly, tax director at UHY Farrelly Dawe White Limited, describes the small benefit exemption as “a simple but excellent scheme that allows employers to reward their employees in a tax-efficient way”.

A summary of the guidelines under the scheme are as follows:

• The benefit must not be in cash. Gift cards and vouchers are popular ways to avail of the scheme, as are tangible gifts such as watches, jewellery and homeware.
• The amount of the benefits must not exceed €1,000 – if they do, the full amount is subject to tax.
• No more than two tax-free benefits per employee per year. Subsequent benefits will be subject to tax.
• The amount can’t be a salary sacrifice. This means you can’t offset the amount against the employee’s pay. The gift or voucher must be paid for outside of payroll.

You don’t have to give the full benefit of €1,000 available. Small business owners may be unable to afford to give each employee €1,000 and prefer to gift a lesser amount.

That’s fine – any amount up to a maximum of €1,000 is allowed.

How much can employers save by using the scheme?

Employers can make considerable savings by using the exemption to reward their employees.

According to gift voucher company One4All, if you were to put a bonus of €1,000 through payroll for an employee who’s on the higher tax band and pays PRSI and tax, it would cost your business €2,313.54.

By using the exemption, you can make potential savings of up to €1,313.54 per employee compared to putting it through payroll.

How employees can benefit from the scheme

Any employee on your company’s payroll – both part time and full time – who pays PAYE income tax, PRSI and USC can benefit from the scheme. How much they save in taxes depends on the tax rate they’re on and what level of USC and PRSI they pay.

Your employee receives the full value of the bonus, which they can use as they wish.

Niall comments that the number of employees who can benefit from the scheme is unlimited.

How employers can start using the scheme

Using the scheme is straightforward. At the moment, there’s no need to file a return or make adjustments to payroll.

However, from 1 January 2024, the scheme will fall under Revenue’s new Enhanced Reporting Requirements. This means from that point onwards, you’ll have to report any eligible non-taxable benefits to Revenue in real time.

Learn more about Enhanced Reporting Requirements in our blog.

The employer purchases vouchers, for example, and the invoice is treated as a fully deductible expense.

Niall explains: “The employer simply provides the voucher/benefit to the employee and does not subject it to tax through the normal employer payroll system.

“The benefit is entered as a ‘non-taxable benefit’ on the system.”

If the company is audited, its accounts will need to show that the total amount invoiced using the exemption doesn’t exceed the number of employees multiplied by €1,000.

What employers can offer their staff

The important thing to remember is that the benefit can’t be paid in cash. Examples of benefits that can be given include:

• Gift cards
• Vouchers for department stores
• Vouchers for grocery stores
• Tangible gifts (such as jewellery, homeware and electrical goods)
• Gym memberships
• Spa treatments
• Concert tickets.

Allan Pryal, formerly of Expert Payroll, says gift vouchers and store gift cards are among the most popular ways that employers are rewarding their employees.

He notes that employers are free to implement the scheme as they wish, provided they follow the rules.

Some companies that promote the Small Benefit Exemption Scheme include One4All, which has thousands of online and national participating outlets, and Allgo reward card, which offers an employee incentive points system for companies.

An alternative option is to offer tangible gifts as a way to reward employees.

Dr Paul Gadie, managing director at Gift Innovations, promotes the Small Benefit Exemption Scheme, and welcomes the change as it allows companies to give two benefits per year, which can be a mix of tangible gifts and vouchers.

He adds: “This presents an extra opportunity to thank and reward employees.”

Niall says tax-free vouchers, tickets or benefits can be used only to purchase goods or services and can’t be redeemed for cash.

He reminds employers not to exceed the maximum amount allowable under the scheme.

Final thoughts on the Small Benefit Exemption Scheme

The Small Benefit Exemption Scheme is a great way to show your appreciation for your employees. You can use it to give your staff an end of year bonus or a Christmas gift.

To sum up, here are a few points to note:

• The benefit must not be paid in cash – cash benefits are fully taxable.
• Only two tax-free benefits can be given each year, up to €1,000.
• Where the gift or voucher exceeds €1,000, the full value is subject to PAYE, USC and PRSI.
• The benefit cannot be part of a salary sacrifice arrangement.
• The employer must buy the voucher. So, for instance, an employee can’t purchase it with the intention of being reimbursed.

Whatever way you avail of the exemption, the small benefit relief offers considerable savings for you and your employees.

Editor’s note: This article was first published in November 2019 and has been updated for relevance.