Paying people

Fringe benefits: types and tax rules

Are you maximising your employee compensation strategy? Sure, the cash figure is an important driver of team quality and staff retention. But you can take that up a notch with fringe benefits.

Jul 24, 20259 min read Share

How often do you hear people complain about their job, but nevertheless sit quiet because they value the health package?

Non-cash compensation can be a powerful motivational force, something you can tap into for the good of your employees and the business as a whole.

The preferred term here in South Africa is fringe benefits, and today we’ll explore exactly what they mean and how a business should manage them.

We’ll guide you through the various types of fringe benefits, their tax implications as per SARS regulations, and how they can strategically impact your business.

Here’s what we’ll cover:

Guide to fringe benefits: Types, taxation, and compliance

Fringe benefits are non-cash additions to an employee’s regular salary.

They are extra perks provided by an employer, often as a reward for services rendered.

In South Africa, these are defined by the Seventh Schedule to the Income Tax Act, to outline what constitutes a taxable benefit for payroll and taxation purposes.

Taxable benefits are considered part of an employee’s remuneration for the year, which is the total monetary and non-monetary earnings that are subject to income tax calculations.

From an employee’s viewpoint, fringe benefits enhance their overall compensation package, offering valuable services or assets they might otherwise have to pay for themselves.

For employers, offering attractive fringe benefits can significantly boost employee satisfaction and retention.

This helps you stand out in a competitive job market, attracting top talent and building a more loyal workforce.

Benefits demonstrate a commitment to employee well-being beyond just the pay cheque.

Types of fringe benefits

South African businesses can offer many types of fringe benefits.

These range from common perks to more unique offerings, all designed to add value for your employees. Understanding how each kind adds value is key to building an appealing benefits package.

Here are some common fringe benefits you might consider:

Fringe benefit	Description
Company cars	Allowing the employee to use a company vehicle for private use. This often includes fuel and maintenance.
Residential accommodation	Offering free or subsidised housing, especially for employees who relocate.
Medical cover	Provides access to private healthcare, offering shorter waiting times and broader services. Offers financial protection against unexpected medical bills.
Low-interest loans	Loans at a rate below the official interest rate to help employees manage finances or make large purchases.
Gadgets and other desirable articles	Providing assets like tablets or sports equipment for free or at a reduced price.
Right of use of an asset	Allowing employees to use company assets in their spare time, such as equipment or recreational facilities.
Meals and refreshments	Free or subsidised meals, especially in a canteen or during extended working hours.
Free or cheap services	Services such as education, transport, or wellness that benefit employees after work.
Debt subsidies or release	Employer pays part or all of an employee’s debt, such as a mortgage or personal loan.
Insurance policy contributions	Employer contributions to various insurance policies for the employee’s benefit.
Contributions to retirement funds	Employer helps employees save for retirement. Becomes mandatory if stated in contract or policy.
Bargaining Council contributions	Contributions negotiated by councils formed by employer organisations and trade unions.
Benefits to relatives	Extending any of the above benefits to an employee’s family members.

Tax implications of fringe benefits

The South African Revenue Service (SARS) interpret and implement the rules for how fringe benefits are valued and taxed.

It’s essential to follow these guidelines for proper payroll processing and to avoid penalties.

Since the value of most fringe benefits is added to an employee’s remuneration, your staff end up paying Pay-As-You-Earn (PAYE) tax on them, just as they would on their cash salary.

It’s the employers’ responsibility to determine the cash equivalent of the benefit. This value is then included on the employee’s IRP5/IT3(a) certificate, which forms the basis of the employee’s annual tax return.

Failure to comply can lead to penalties, including a 10% penalty on understated or undeclared benefits.

Taxable versus non-taxable fringe benefits

Not all benefits are treated the same way by SARS. Some are fully taxable, while others may be partially or completely exempt.

For accurate tax compliance it’s important to know the difference.

Many of our earlier examples, such as company cars, low-interest loans, accommodation subsidies, gadgets or gifts, and most contributions to medical schemes, are all considered taxable fringe benefits.

Additionally, long service awards are taxable if their value exceeds R5,000.

It’s important to note that this R5,000 threshold applies to the total value of all long service awards received by an employee when certain conditions are met.

So it’s more important to be clear on the exceptions. Here are the most common examples of non-taxable benefits:

• Certain medical costs. Medical treatment provided under a specific employer scheme can be exempt if it meets certain criteria, like being a prescribed minimum benefit and not recovered from a medical scheme. Also, medical expenses for employees over 65 or retired employees are generally not taxed.
• Study loans. Loans provided to employees for furthering their studies are often excluded from taxable benefits.
• Low-cost housing loans. Loans for acquiring low-cost housing can be exempt if specific conditions are met regarding the property’s value and the employee’s income.
• “No value”/Incidental items. The Seventh Schedule to the Income Tax Act mentions certain low-value or incidental benefits that are considered to have “no value” for tax purposes. This mirrors the globally recognised “de minimis” rule for benefits that may not be taxable due to their minimal value—such as occasional snacks or small gifts.
• Uniforms. Uniforms or uniform allowances are generally non-taxable if the uniform is distinct from ordinary clothing and is required for duty.
• Professional fees. If membership to a professional body is a condition of employment, payment of those fees is tax-exempt when covered by the employer.
• Relocation costs. If an employee is transferred at the employer’s insistence, some of those costs may be exempt.

How fringe benefits impact businesses

You can view fringe benefits as a strategic investment because they support your mission in two ways. Both save your business money on recruitment and training new hires:

1. Making your company a more attractive employer

You attract and secure the best candidates, who require less in the way of training and who get up to speed sooner.

2. Boosting employee retention

You reduce staff turnover because your employees feel valued through these additional perks.

This growth in loyalty means they are more likely to stay with your company longer.

Either way, you save on advertising job openings, screening applications, conducting interviews, and potentially paying agency fees.

You also expend less time and resources in onboarding new hires.

By retaining staff through attractive benefits, you avoid these recurring expenses, creating a more stable and efficient workforce.

Staying compliant

To keep up with SARS requirements and South African labour laws, you need to maintain detailed records of all benefits provided, their valuation, and how they were calculated.

Regularly review SARS guides and updates, as tax laws can change.

Ensure your payroll system is capable of accurately calculating and reporting these benefits.

Finally, openly communicate with your employees about their benefits. Explain how benefits are valued and the tax implications of each type.

This transparency builds trust and helps employees understand their overall compensation.

Best practices for managing fringe benefits

The ideal benefits package aligns with both business goals and employee needs.

For example, offering gym memberships or health insurance is likely to improve employee wellness. That in turn can boost productivity. 

Similarly, educational assistance or help with work-life balance can help employees dedicate time to professional growth, further enhancing your human capital.

Let’s look at the steps you can take to tailor the most appropriate package.

1. Assess your company’s objectives and budget

Start by clarifying what you aim to achieve with your benefits package.

Do you want to attract top talent, improve employee wellbeing, or boost retention?

Establish a realistic budget that aligns with these goals.

2. Understand employee needs

Different employees value different perks.

Conduct surveys, focus groups, or informal discussions to understand what benefits each team truly desires.

Consider the diverse demographics within your workforce, as preferences can vary by age, family status, and career stage.

3. Benchmark against industry standards

Research what other companies in your sector and region are offering.

This helps ensure your benefits package is competitive and meets prevailing expectations in the South African job market.

4. Design a flexible benefits programme

Where possible, offer plenty of choice. A “cafeteria-style” approach allows employees to select benefits that best suit their individual needs, increasing the perceived value of your offering.

5. Implement a tracking systems

Once benefits are chosen, meticulous record-keeping is crucial. Use systems that accurately track the provision and value of each benefit.

This is vital for correct tax calculations and SARS compliance.

6. Manage your budget carefully

Continuously monitor the costs associated with your benefits.

Ensure the programme remains financially sustainable for your business.

Regularly review vendor contracts and look for cost-effective solutions.

7. Communicate effectively with employees

Openly explain your benefits package.

Use clear, accessible language to describe what each benefit is, how it works, and its value to your staff. Provide details on any tax implications.

Regular communication helps employees understand and appreciate the extent of this compensation.

How payroll software simplifies fringe benefit management

The above tips alluded to careful management and tracking of the benefits you issue and how they are distributed across your different teams.

Specialised payroll software can be invaluable in staying on top of all the variables.

Modern payroll solutions automate the calculation of fringe benefit values, ensuring the correct amounts are added to the employees’ remuneration.

This significantly reduces manual errors and saves considerable time for your HR and payroll teams.

Integrated payroll and HR software like Sage 300 People can also simplify record-keeping.

With integration you can store all benefit data centrally, greatly simplifying reporting and audits.

Many systems also provide employee self-service portals where staff can view their payslips and check benefit statements.

This gives employees a full understanding of their compensation, as well as the kind of transparency that enhances employee satisfaction.

Furthermore, the top payroll software vendors regularly update their solutions to reflect the latest SARS regulations, so you automatically stay compliant with local tax laws.

Final thoughts

Fringe benefits serve as a proven strategic tool that helps you cultivate a satisfied, loyal, and productive workforce.

It’s an investment in your employees that sets up your company to attract top talent, reduce costly turnover, and build a positive company culture.

With the right approach and appropriate tools you can manage benefits packages efficiently, while also complying with SARS regulations and accurately reporting on their results.

A well-managed fringe benefits programme underscores your commitment to your people, and can contribute to your business strategy.