Energy costs are rising, and people are looking for help from their employers. What supports can UK employers offer, and what are the tax implications? Caroline Harwood explains
Very few people in the UK will not be impacted by the rocketing price of energy costs. So, understandably, employers may be faced with calls for help and will want to support their employees where they can.
What can employers do, and what are the associated tax and national insurance implications?
- Additional pay or bonuses
As with any other cash payments arising from employment, Pay As You Earn/National Insurance Contribution (PAYE/NIC) will be due. There are no reliefs or easements available despite the purpose of the payment.
- Reimbursing the employee for an energy bill
Employers must be aware that reimbursing an employee for a specific energy bill will be treated as earnings for tax and NIC purposes at the time of payment. This means that the sum reimbursed will need to be subject to PAYE, and both the employee and employer will pay NIC at that time.
However, if the employee works from home, the potential to treat some of the energy costs as a business expense and be exempt from tax/NIC exists.
- Paying the energy provider
It may be possible for an employer to arrange to pay the energy provider directly on behalf of the employee. This would be treated as a benefit-in-kind (BIK), and the tax treatment is the same as reimbursement.
An energy provider may also be able to issue a bill in the name of the employer, but the underlying supply contract will remain between the employee (i.e. the energy customer) and the energy provider. This form of payment will also be treated as earnings for NIC purposes for both the employee and employer at the time of payment.
If an energy provider is prepared to enter into an energy supply contract with an employer to supply an employee’s property directly, the same tax treatment will arise, but no employee NIC would be due. It is unlikely, however, that energy providers will wish to do this for regulatory reasons.
- Using salary sacrifice
Salary sacrifice is a very common mechanism for delivering BIKs. However, if this is used to help pay an employee’s energy costs on a pound-for-pound basis, the tax treatment is the same as for BIKs.
The NIC treatment would repeat the position for paying the energy provider directly. In this instance, salary sacrifice is probably not worthwhile for employers to consider.
Despite this, a longer-term option utilising salary sacrifice to deliver an electric vehicle (EV) car for an employee can be cost-effective, with the added benefit of helping with your organisation’s environmental, social and governance (ESG) agenda.
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Making a loan
Perhaps the most tax/NIC effective way to assist employees would be for the employer to make an interest-free loan. If the loan is capped at less than £10,000, it has no tax implications and is not reportable as a BIK. It also has no NIC implications – this cap includes any existing loans the employee may have from their employer. Higher-value loans are a reportable benefit.
An employer can agree to repayment over whatever terms it is comfortable with or write the loan (or part of it) off later. If a write-off occurs, the sum involved will be treated as a BIK and subject to NIC. However, it is essential to note that the loan terms must not include any intention to write it off at the outset, as HMRC will treat a loan as earnings.
Caroline Harwood is Partner of National Head of Employment Tax at BDO UK