Tax-free gift vouchers for directors and employees
Under Irish Revenue’s Small Business Exemption Scheme, directors and employees can receive a non-cash bonus of up to €500 once a year. The most common way to avail of this is through vouchers. It’s a tax-efficient way to reward your staff during the year or give a bonus this Christmas.
So long as certain guidelines are followed, neither your company nor your employees will pay PAYE, PRSI, or USI. This can lead to a potential saving of over €600 in tax per employee. If you haven’t taken advantage of the Small Benefit Exemption Scheme so far, make sure you do so before 31st December. Tax-free vouchers can only be claimed once a year and can’t be carried forward!
In this guide, you’ll learn:
- The background to tax-free vouchers
- The Small Business Exemption Scheme rules
- How much tax can I save?
- Tax-free voucher options
The background to tax-free vouchers
In 2016, we saw the Small Business Exemption Scheme threshold double from €250 to €500. The tax-free vouchers are popular amongst companies who want to reward their employees with Christmas bonuses.
It’s particularly popular with owners/directors of small businesses who also have their spouse work in the same establishment, as they could benefit from up to €1000 in tax-free vouchers (check out our What Does a Company Director Do? post as well.
There is no paperwork involved and no return to be made to avail of the scheme. Business owners are simply invoiced for the total value of tax-free vouchers ordered. The invoice is treated as a fully deductible business expense for accountancy purposes and there is no need to adjust payroll – provided the rules listed below are followed.
How to avail of tax-free vouchers
Employers can use the scheme at any time, as long it is only used once a year per employee.
1. Choose a voucher
The voucher can be up to €500 and the scheme can only be applied to a single voucher. So, you can't purchase two vouchers worth €250 at different times of the year and claim it under this scheme.
2. Purchase the voucher
When you have made the purchase, make sure that you keep the invoice. We recommend using online bookkeeping software to make sure you are organised.
3. Tax-deductible expense
Treat the invoice as a tax-deductible expense. Your accountant will look for these records when doing your tax return. Get in touch if you have any questions.
The Small Business Exemption rules
We have outlined the necessary guidelines below to help you qualify for the tax exemption:
Must be purchased from business funds
Tax-free vouchers must be purchased from the business bank account or credit card.
It is important to note – directors or employees cannot purchase a voucher themselves and seek reimbursement from the company.
Once per year
The scheme can only be availed of once per year. Only one tax-free voucher can be paid to an individual in any one year, even if you do not avail of the maximum annual allowance of €500. If more than one bonus is given in a year, it is only the first one that will qualify for tax-free status.
The benefit must be provided in a non-cash format e.g. gift voucher, which cannot be converted into cash. As the payment must be in a non-cash form, the most common way to avail of this scheme is by purchasing gift vouchers.
A salary sacrifice is not allowed
You cannot fund the scheme from a deduction from your employee’s salary. You must get invoiced for the rewards and pay this external to payroll.
How much tax can I save?
|Small Business Exemption Rules||Normal payroll in order to receive €500 (i.e. after tax)|
|PAYE||0%||@ 40% = €417|
|PRSI – employee||0%||@ 4% = €42|
|USC||0%||@ 8% = €83|
|Total employee tax||€0||€542|
|PRSI – employer tax||0%||@ 10.75% = €112.015|