Employees who receive a range of job perks will get less money in their pay packets from the New Year as PRSI is applied to existing taxed benefits and deducted at source from other benefits for the first time.
The new benefit-in-kind tax regime looks set to call time on the days when company cars were the number one perk, as employers must carry a new administrative burden and pay 10.75 per cent PRSI on company fleets from January 1st.
From this date, a number of items will be treated as notional pay and added by the employer to weekly or monthly cash pay.
These items will then be subject to income tax, PRSI and the 2 per cent health levy based on their notional value and will be deducted at source. Previously, tax - but not PRSI or the health contribution - was collected on benefits by restricting tax credits against the income on the employee's personal tax return.
The benefits affected include preferential loans, medical insurance, provision of goods and services, vouchers, certain staff entertaining, medical services provided by the employer in-house and club subscriptions.
Mr John Bradley, tax partner at KPMG, believes the changes could force employers to consider offering cash alternatives. A number of KPMG's employer clients planned to replace company car schemes with cash pay, he confirmed. "It might be different where an employer has sales reps and they need to have cars of a certain standard," Mr Bradley said. "But where the company car is a perk, it has become less attractive financially."
KPMG warns that there may be instances in the pay period when the tax and PRSI due by the employee on notional pay is greater than their main cash pay for the period, or eats into the bulk of it.
In these situations, the employer must pay the shortfall and collect the amount from the employee at a later stage.
"If I give somebody a holiday voucher for €5,000 as their bonus and that is taxed at 42 per cent, then that is tax of €2,000 plus," said Mr Bradley.
But the person's monthly net pay could be less than this amount, or not be too much over it, meaning they are left with a holiday voucher but no money to pay for day-to-day expenses.
"That could be particularly problematic around Christmas 2004," Mr Bradley added, as employers who give people on weekly pay a voucher bonus in December will actually be restricting their cash flow.
The Revenue is due to publish an employers' guide detailing the new arrangements soon.
