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 €1,000 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 €1,200 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
Tax-free vouchers are popular amongst companies who want to reward their employees with Christmas bonuses.
It’s also popular with owners/directors of small businesses who have their spouse work in the same establishment, as they could benefit from up to €1000 in tax-free vouchers. Note that in order for directors and spouses to avail of this scheme, they must be on the payroll.
No paperwork is involved and no return has 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.
The Small Business Exemption Scheme Rules
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 – employees cannot purchase a voucher themselves and seek reimbursement from the company.
Twice per year
Only two vouchers can be paid to an individual in any one year, even if you do not avail of the maximum annual allowance of €1,000. If more than two bonuses are given in a year, it is only two 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.
Recipients need to be on payroll
Directors who avail of this scheme need to be on the company's payroll in order to qualify.
How much tax can I save per €500 voucher?
|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|
Total tax saved: €654
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 €1,000 and the scheme can be split between two vouchers. For instance, you can purchase two vouchers for €500 each annually.
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.
Tax-free voucher options
Universal gift cards
Larissa is a Fellow Chartered Accountant (FCA) and is the CEO of Accountant Online, which specialises in company formation, company secretarial, annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland and the UK.