The Observer: Cash

Tax-free employee benefits can boost take-home pay, writes Annie Shaw

Christmas could come early for employees in the form of a pay rise that won't cost their employers a penny - because the present comes straight from Gordon Brown.

The secret of this largesse is the use of tax breaks on employee benefits to boost take-home pay. A whole industry has arisen from devising employee benefit schemes that make the most of tax advantages on certain goods and services. They not only save the employee money, but can also, in many cases, make savings in national insurance contributions for the employer, too.

The latest to come on the scene, just in time for Christmas, is the Flexphone scheme, devised by accountants BDO Stoy Hayward in association with Isis Telecommunications, to take advantage of tax relief on mobile phones provided by employers. The employer provides a phone for the employee and pays his mobile phone bills, but then claws back the cost of the phone and the calls from the employee's earnings. The clawback comes from gross earnings, before deductions, so the employee saves on tax and NI and the employer saves on NI, or passes the saving on as a pay rise.

The beauty of the scheme is that the employee does not have to use the phone for work and can extend the benefit to his family, as it allows him to have two phones for himself and a further three for family members - a number agreed with the Revenue.

Ironically, the scheme comes about as a result of the tax imposed on company-provided mobile phones by Chancellor Norman Lamont in 1991. Tax law on benefits in kind is written so that tax is imposed not only on benefits supplied to employees, but also on benefits given to members of their families - to prevent evasion. So when Gordon Brown removed the tax on mobiles in 1999, the wording of the reversal also removed the tax on mobiles supplied for private use and to family members, and bingo! a new benefit was potentially born. Had the mobile tax never been introduced in the first place, a mobile supplied for private use would simply have remained a taxable benefit in kind.

How much money staff will save under the Flexphone scheme depends on how big their phone bill is, says Shawn Healy, senior tax manager of BDO Stoy Hayward.

'A high earner taking the maximum five phones could save almost £1,000 a year,' he says. 'The employee gets to save at least 33 per cent on the cost of the total package,' he says. 'Anyone earning more than £31,000 will save 41 per cent.'

The phones scheme is modelled on the Home Computing Initiative, a tax incentive launched in 1999 aimed at improving computer literacy.

To find out more about Flexphone email info@flexphone.co.uk or call 0845 408 2035.

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