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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Employment income: flexible benefit plans

Sections 62 and 203 ITEPA 2003

Many employers have introduced flexible benefit plans for their employees. Broadly speaking, employees are given the opportunity to choose the benefits in kind they would like to receive from a menu of possibilities. Many schemes give each benefit a monetary value which usually bears no particular relationship to its taxable value under the benefits code (see EIM21101). Benefits in kind which may be included in such schemes include company cars, childcare provision, private health insurance, additional pension contributions, and even additional days annual holiday.

You may be asked to advise on the tax implications of these schemes. Requests are usually received at the time when the employer introduces the scheme, when they often involve an element of “salary sacrifice”. In other words, the employee gives up some part of his or her original gross pay in return for additional benefits in kind.

Bear in mind that this is not an area where HMRC is obliged to give any kind of clearance, or pre-transaction ruling. Employers and employees are free to enter into whatever agreements they wish. No doubt they will obtain appropriate professional advice before doing so. But you can only express an opinion on the tax effect of such a scheme once it has been put in place.

Subject to that, in considering these schemes you should concentrate on two main areas:

  • firstly, has the employee’s contract of employment been varied so that there is a contractual reduction in the employee’s gross pay, and not simply a mandated deduction from gross pay (see EIM01141)?
  • secondly, if there has been a contractual reduction in the employee’s gross pay, do the benefits that the employee gets count as earnings within Section 62 ITEPA 2003, or are they merely treated as earnings under the benefits code (see EIM01142)?

Many of these schemes include references to a “benefit allowance”, “flex fund” or “flex account”. You will find guidance on this aspect at EIM01143.