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, you’re not alone. According to a 2017 survey by gift voucher company One4All, more than half of employers are unaware of the tax relief.
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?
The 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.
Under the measures, employers can give their employees a small benefit of up to €500 in value tax-free each year.
Niall Donnelly, Head of Corporate Tax Structuring 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.
- The amount of the benefit must not exceed €500. If it is more than €500, the full amount is subject to tax.
- No more than one benefit per employee per year. Subsequent benefits will be subject to tax even if the total amount is less than €500.
- The amount cannot 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 €500 available. Small business owners may be unable to afford to give each employee €500 and prefer to gift a lesser amount. That’s fine – any amount up to a maximum of €500 is allowable.
How much can employers save by using the scheme?
Employers can make considerable savings by using the exemption to reward their employees. If you were to put a bonus of €500 through payroll, the net amount for your employee would be significantly reduced.
By using the exemption, you can make potential savings of up to €653 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 small benefit 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.
Donnelly comments that the number of employees who can benefit from the scheme is unlimited. However, he stresses that each employee may receive one benefit only and up to a maximum value of €500 in any given year.
He adds: “For example, if an employee receives two vouchers worth €250 each in the year from their employer, the second voucher would not qualify for the tax exemption.”
How employers can start using the scheme
Using the scheme is straightforward. There is no need to file a return or make adjustments to payroll. The employer purchases the vouchers and the invoice is treated as a fully deductible expense.
Donnelly 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 does not exceed the number of employees multiplied by €500.
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
- Gym memberships
- Spa treatments
- Concert tickets.
Allan Pryal of Expert Payroll says gift vouchers for One4All and supermarkets 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.
The exemption applies only to the first payment. If you give your employees vouchers, for example, the first amount will be exempt from taxes, while the remainder will be subject to tax.
Pryal explains that if an employer gives two vouchers, for example, €200 during the year and €300 later on, then the second will be subject to tax.
Some companies that promote the small benefit 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.
Donnelly 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: “If the value of the benefit/voucher exceeds €500, then the full amount is subject to tax and not just the excess.
“Employers should take care to ensure the maximum value of €500 is not breached.”
Conclusion 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.
In conclusion, here are a few points to note:
- The benefit must not be paid in cash – cash benefits are fully taxable.
- Only one bonus can be given each year. If the €500 is split into two or more payments, only the first voucher will be tax-free.
- Where the gift or voucher exceeds €500, 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.