UK employers looking to help employees struggling financially due to the Covid-19 pandemic and its aftermath may consider setting up an employee benevolent fund or hardship fund.
However, there are various issues that need to be considered before putting in place support so as to avoid unexpected tax, employment law and consumer credit issues.
What form could a benevolent fund or hardship fund take?
There are a number of possible options for setting up an employee benevolent scheme. At its simplest, it could just involve making grants to employees on an ad hoc basis. Alternatively, the employer may want to adopt a more formalised scheme under which employees can apply, perhaps with set criteria. Loans could potentially also be offered, although this gives rise to potential complications which we consider below.
Chris Thomas
Legal Director
Setting up a charity can allow benefits to be provided in a more tax efficient way and is likely to be particularly suitable where the employer anticipates that the fund will continue in the medium or longer term.
Other options might include setting up a charity, which can allow benefits to be provided in a more tax efficient way and is likely to be particularly suitable where the employer anticipates that the fund will continue in the medium or longer term. Some companies have also sought to use existing employee benefit trusts which have surplus cash available.
What are the tax consequences?
The tax consequences will vary depending on the form of the fund and the type of benefits provided.
Simple cash grants will be fully taxable, and National Insurance contributions (NICs) will also be required.
Loans will often be tax neutral, even where the loan is interest free, due to an exemption to the benefit in kind charge for loans under £10,000. However, care is needed where other loans have already been made to that employee - for example, a season ticket loan. If the loan were waived, that would be fully taxable.
Are there any other issues in relation to loans?
Where loans are provided, consumer credit loans may apply. This is a complex area and quite fact specific, but in some cases it is possible that Financial Conduct Authority (FCA) authorisation may be needed. Advice should be taken before proceeding down this route.
What about setting up a charity?
Setting up a charity may be a good option if the employer is looking for a medium to longer-term proposition, beyond the immediate impact of Covid-19.
The principal advantage of setting up a charity is that it should be possible to provide support to employees free of tax. Setting up a charity can also have optical advantages, and is the best structure if there is an intention for other employees to be able to contribute.
On the other hand, setting up a charity will involve additional governance considerations and legal steps, and the need to register with the Charity Commission, which can take several months. It may be possible to start providing benefits pending registration being obtained, but the tax position would need to be considered before doing so.
What about payments to family members of deceased employees?
Advice should be taken if payments to family members of deceased employees are not being made under existing insurance-backed arrangements or under a pension scheme, as it is possible that tax could be due on the payment. This is unlikely to have been taken into account by either the employer or the recipient.
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