The most tax-efficient benefits are employer pension contributions, electric company cars, and a range of smaller tax-free perks such as a mobile phone, cycle to work schemes, staff events and trivial benefits. Each gives employees more value than the same amount paid as salary, because little or no tax or National Insurance is due.
The rules are specific, though. Stay inside them and the benefit is tax-free; go slightly outside and the whole amount can become taxable.
Pension contributions
Employer contributions to a registered pension scheme are generally tax-deductible for the business and free of income tax and National Insurance for the employee, within the £60,000 annual allowance. They are deductible in the period they are paid, not when accrued.
Salary sacrifice, where an employee gives up some salary in return for a higher employer contribution, can save National Insurance for both sides. From April 2029 the National Insurance relief on sacrificed pension contributions will be capped at £2,000 a year, so the benefit will be smaller for higher contributions after that date.
Electric company cars
The benefit in kind on a fully electric company car is 4 percent of the list price for 2026/27, rising to 5 percent in 2027/28, 7 percent in 2028/29 and 9 percent in 2029/30. That is far lower than for petrol or diesel cars.
For example, an electric car with a list price of £40,000 gives a taxable benefit of £1,600 for 2026/27. A higher-rate taxpayer pays £640 in tax on it, and the employer pays Class 1A National Insurance of £240 at 15 percent. New zero-emission cars also qualify for a 100 percent first-year allowance for the business, extended to March 2027.
Smaller tax-free benefits
- Mobile phone: one phone per employee is exempt, provided the contract is between the employer and the provider. If the employee holds the contract and the business pays the bill, it is taxable.
- Cycle to work: bicycles and safety equipment provided for commuting are exempt.
- Health: an annual health screening, eye tests for staff who use screens, and employee assistance programmes are exempt.
- Training: work-related training paid for by the employer is exempt.
- Workplace parking: parking at or near work is exempt.
Trivial benefits
Small gifts such as a bottle of wine, flowers or a meal out are exempt if each costs £50 or less including VAT, is not cash or a cash voucher, is not a reward for work or performance, and is not part of the employee's contract. Directors of close companies, and their family or household members who are employees, are limited to £300 a year in total.
Staff parties and long service
An annual event, such as a Christmas party, is exempt if it is open to all employees, or all at one location, and the total cost per head for the year is £150 or less including VAT, transport and accommodation. This is a limit, not an allowance: go over by £1 and the whole amount becomes taxable.
Long service awards are exempt for 20 or more years of service if they are not cash, cost no more than £50 per year of service and no similar award has been made in the previous ten years.
Reporting
Taxable benefits are currently reported on forms P11D and P11D(b) by 6 July, with Class 1A National Insurance paid by 22 July. From 6 April 2027 most benefits must be reported through payroll instead, so it is worth reviewing how you record benefits before then. Exempt benefits do not need to be reported.
What to do
- List the benefits you currently provide and check each meets the exemption rules.
- Consider whether salary sacrifice pension or electric car schemes would suit your staff.
- Keep the staff party within £150 per head across the year.
- Prepare for payrolling benefits from April 2027.
If you would like us to review your benefits package, book a free call.
