October 29th, 2012 / Insight posted in

Perk or pay: which is best?

CR writes: Last year I set up a small technology company that now has five employees. We have been trying to set up a group medical insurance scheme, but as this has taken some time we have been paying each employee an additional amount of salary so they can fund their own medical insurance. In future the company will contribute £1,500 to each employee’s medical insurance. From a tax point of view, does it make a difference if I stop the additional salary and supply the medical benefit, or should we continue to pay the additional salary and then deduct the full cost of the medical insurance?

From a tax point of view, the only difference is the national insurance that employees have to pay on the additional salary. The amount of each employee’s national insurance will depend on his or her salary. For the current tax year, any earnings above £817 a week attract an employee national insurance charge of 2%.

If you continue to pay the additional salary and then deduct the cost of each employee’s medical insurance from their net pay, the deductions will probably be higher than the additional net pay. This is because of the tax deducted from the extra pay. With this arrangement there would be no taxable benefit for the employees because they would be paying the total cost of the medical insurance themselves. 

On the other hand, if you stopped the additional salary and provided the medical insurance as a benefit in kind worth £1,500, then each employee would have to pay income tax on the cost of the medical insurance. This will eventually be incorporated into their individual tax codes with the tax on the benefit in kind being collected throughout the year from their monthly pay.