With the Small Benefit Scheme limit having increased to €500, employers are looking at different ways to use this tax break in their businesses. The scheme offered by Irish Revenue allows employers to reward employees up to €500 tax-free per year. As long as the 4 key rules are complied with, no employee BIK or employer PRSI need be paid.
€500 per employee per year is not an insignificant amount of money, so instead of simply giving it to employees as a thank you at the end of the year, many companies are now looking to use it to make their annual bonus scheme more tax-efficient.
While this is undoubtedly a sensible thing to do , there are some important points to bear in mind to ensure that the bonus payments comply with the tax relief. The tips below will ensure you stay within the rules of the scheme.
The 1st thing to ensure is that the bonus is an annual one, or if it is not, that only the FIRST BONUS paid in a year is included in the scheme. This is because the Small Benefit Scheme only allows one reward per year to be given tax-free, and if more than one reward is given, the tax break only applies to the first one given in any tax year (Jan-Dec).
SALARY SACRIFICE / GUARANTEED BONUSES
Irish Revenue has taken the view that salary sacrifice (ie reducing a salary payment in one month and replacing it with a tax-free benefit) contravenes the spirit of the Small Benefit Scheme, and in general they do not approve it. Only bonuses that are not part of salary can therefore be included in the scheme. If a bonus is guaranteed, it may form part of an employees "normal salary" and therefore would not qualify for tax-free status.
The maximum allowance on the Small Benefit Scheme is €500 per employee (per year). Therefore, if an employee's bonus is less than that, it can be paid entirely tax-free. However, if the bonus is greater than €500, then only €500 may be paid tax-free, with the remainder being paid through payroll at the normal tax and social welfare rates.
A key requiremrent is that the tax-free bonus is given in non-cash form. In most cases, companies use multi-retailer gift vouchers as being the nearest equivalent to cash, and the most convenient for the employee. The tax-free bonus can though be any tangible or intangible benefit - as long as it cannot readibly be convereted into cash.
Many companies using the Small Beenfit Scheme to pay the first €500 of bonuses tax-free often give the employees the option of opting out, and simply getting their full bonus paid via payroll without any tax-savings. If you would like to receive a template of the opt-out letter Allgo provides for clients, just contact us.
Giving the employee the option of opting-out prevents any contractual issues, and in some cases employees may wish to see the higher gross amount appear on their payslips and tax returns. In Allgo's experience, however, 99.9% of employees elect to save the tax - after all, a €500 tax-free bonus is worth over €1000 if on the higher rate of tax (see below)!
Tax-Saving on Small Benefit Exemption Scheme
Since 2015, when the tax-free limit was doubled from €250 to €500, more and more companies have started paying bonuses and other non-salary rewards through the scheme - not surprising when you see the savings involved.
For more about the Small Benefit Scheme, download our definitive guide -