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.
Provided certain guidelines are followed, neither your company nor your employees will pay PAYE, PRSI or USI, potentially saving a total of €653.65 in tax per employee. If you haven’t availed of the Small Benefit Exemption Scheme so far in 2020, make sure you do before 31st December!
In this blog, 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.
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.
The Small Business Exemption Scheme 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?
- The scheme allows both the employer and employee to save tax. For example, a higher rate taxpayer paying 40% PAYE will save up to €542 in tax by availing of this scheme.
- The taxpayer’s net after-tax salary to pay for the voucher is €500. In order for the taxpayer to obtain this cash, they require a gross salary €1,042.
- The difference of €542 is a combination of PAYE, USC, and PRSI which would be deducted if you received this amount in a salary.
- The employer also saves 10.75% of Employers PRSI for people on the A-class rate of PRSI – the majority of private-sector employees.
|PAYE (40%) Higher Rate Taxpayer||€417|
|Total Tax Saved||€542|
Tax-free voucher options
In no particular order we have listed possible options for tax-free gift vouchers that qualify for the government’s Small Business Exemption Scheme:
- One4all are a common choice for tax-free gift vouchers. They offer a wide range of gift card designs for every occasion with over 8,500 stores to choose from nationwide. To see the full list of retailers, visit their website; https://www.one4all.ie/.
- Allgo is perfect for large numbers of staff who want a flexible gift card for use in-store. Businesses looking to use the Small Benefits Exemption Scheme for the year-round programme can avail of Allgo’s services. AllGifts Points is a scheme that awards points to employees throughout the year, with the restriction that the employees can only spend them at year-end. For more information, head on over to their website; https://www.allgo.ie/rewards/tax-free-staff-rewards/
If you have other ideas for the tax-free voucher scheme, talk to your accountant to ensure they comply with the rules.
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