Who doesn’t want to pay less tax on their income? There are a few ways you can go about it. And, thanks to an amendment in last month’s budget, those who get an end-of-year bonus – or one at any time of year – will be able to keep more of it from January of next year.
But what if you don’t get such a bonus? Whether you’re entitled to a payment of some €1,500 or not, many of us may now be thinking: can we use this latest increase to reduce our overall income tax bill for 2025?
Here, we take a look at how the scheme works.
Small benefit exemption
The small benefit exemption has long been used by employers to make a tax-free gift to their employees. It’s an attractive proposition, given that a cash bonus will incur a tax rate of some 52 per cent. During years when long-term wage rises were scarce, it was also a method employers used to try to keep staff onside.
Approaching year end, many employees will be banking on this scheme to boost their spending power over Christmas – and pay for the gifts, booze and food that this season seems to demand.
The key with the scheme is that, to avail of the tax relief, the benefit can only be used to buy goods or services, such as through tax-free vouchers or cards; it must be tangible. “They cannot be redeemed for cash,” says Revenue.
Not so long ago, the exemption entitled you to just one tax-free gift of €500 a year. This changed in 2022 to €1,000, which could be paid out in two payments. Now, from January 2025, it has increased to €1,500 – and the benefit can be paid out across as many as five separate payments during a year.
In what may be a sign that the most recent increase was a pre-election softener, a deadline has now been put on the scheme: 2030.
Until then, however, it’s likely to be attractive.
Given the current “challenged labour market”, Liam Kenny, a tax partner with RSM Ireland, expects there to be take-up among employers of the new increase, as it presents “a tax-efficient incentive for employees”.
As he points out, someone paying tax at the higher rate of 52 per cent (including PRSI and USC), would need to earn €3,125 in order to get to keep €1,500. So the benefit of the voucher is higher than just its face value.
As mentioned, to get the tax-free benefit, the bonus must be in the form of a tangible asset, such as a gift card which cannot be transferred into cash. Revenue is quite strict on this: if you are gifted a card, such as a disposable credit card, which can be used to withdraw funds from an ATM, it won’t qualify for tax relief.
“As the gift card is redeemable, in full or in part, for cash it will not be a qualifying incentive for the purposes of the small benefit exemption,” says Kenny. Of course, you will find some vouchers ending up on a resale site such as adverts.ie, as the owners look for a cash value.
One thing to watch, notes Kenny, is where an employer inadvertently exceeds the benefit limit to an employee. In addition to the typical voucher, other benefits to employees, such as flowers for a wedding, or a hamper at Christmas time, may come under the remit of the scheme. These would then erode the top threshold of €1,500 a year, which means that someone getting vouchers of €1,500 may end up with a tax bill on part of the “bonus”.
“It’s important for employers to carefully monitor how many benefits they give,” says Kenny.
If you get a bonus in excess of €1,500, you might wonder whether or not you can get a voucher for part of the payment. Key to this will be whether or not the voucher part of the payment is deemed to be discretionary or not.
As Kenny notes, “pretty much anything in a contract is a taxable emolument”. So, if your contract states you’re entitled to an annual bonus of €5,000, for example, this would be outside the scope of the small benefit exemption.
If, however, such payments are offered at the discretion of your employer, you might get €1,500 through the voucher, and the remainder through payroll.
Let’s say your employer typically gives you a payment of €1,000 a year. Can you carry over the unused €500 to be used another year?
No, says Revenue. “Unused allowance amounts cannot be carried over,” it says. It is offered on a “use it or lose it” basis, Kenny says, again stressing that it’s at the discretion of the employer.
But could your employer reduce your salary by €1,500 and give you this shortfall by way of tax-free vouchers? Doing so could save a standard-rate taxpayer some 20 per cent and a higher-rate taxpayer 52 per cent.
Unfortunately, Revenue says no.
Consider the example of someone earning €51,000, who agrees to forgo €1,000 of salary in order to avail of a shopping voucher worth a similar amount.
While it might at first appear that this should be covered by the scheme – after all, it is being paid out in a shopping voucher – the person would actually end up paying income tax, USC and PRSI on the face value of the voucher.
According to Revenue, this is because the person received the shopping voucher as part of an arrangement they made in exchange for a reduction in their salary. “The voucher will therefore not qualify for the small benefit exemption,” it says.
Kenny agrees that so-called salary sacrifice arrangements will not be tolerated.
“If there is a perception of salary sacrifice, it will become taxable,” says Kenny, adding that the benefit needs to be offered at the discretion of the employer – and if it’s a figure that’s included in the employee’s contract of employment, it won’t be seen as being at the employer’s discretion.
Other incentives
While many pre-budget submissions argued for the introduction of tax relief on gym membership, perhaps as a benefit that could be paid by your employer out of your gross earnings, it didn’t come to pass.
There are, however, a number of other benefits. One of the more common methods of avoiding tax on your salary is to sign up for a transport pass via the Taxsaver Commuter Ticket Scheme. It allows you to cover your transport costs from your gross salary, while employers can save on their PRSI costs for you.
It covers passes for the bus, train, Luas or ferry services provided by either State or private operators, and the savings can be substantial – between 28.5 per cent and 52 per cent of travel costs, depending on whether you’re a standard or higher-rate taxpayer.
If you spend €500 on an annual pass, that means you could save €140 if you pay tax at the standard rate, or €240 if you’re a higher-rate taxpayer.
One downside: the scheme only works on annual or monthly passes. Given the change in working habits since the pandemic, such a pass may no longer be appropriate for those of the working population operating under hybrid conditions.
The Bike to Work scheme is another way of saving on tax as it allows you to pay for a new bike (up to €1,250 for a regular bike, and up to €1,500 for an electric bike) out of your gross earnings. This is akin to savings of as much as 52 per cent for higher-rate tax payers.
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