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Many flexible benefit plans involve the employee being allocated a 鈥渂enefit allowance鈥� (described in some schemes as a 鈥渇lex fund鈥� or 鈥渇lex account鈥�). This 鈥渁llowance鈥� represents the amount of money that the employer is prepared to spend to provide the employee with their chosen benefits. You will usually be able to accept that the 鈥渂enefit allowance鈥� itself is not an amount on which the employer must operate PAYE/NIC, except to the extent that the employee chooses to draw it in cash. In most cases, the amount of cash that the employee is entitled to receive is not fixed until the employee has made his or her choice ofbenefits.

For example, an employee may be allocated a 鈥渂enefit allowance鈥� of 拢2,000 per annum, of which they 鈥渟pend鈥� 拢1,700 on various benefits in kind and take 拢300 per annum in cash. The 拢300 is subject to PAYE and Class 1 NIC, but the 拢1,700 is not.The benefits in kind that the employee gets are taxed in the normal way (and subject to Class 1A NIC from 6 April 2000).

Sometimes, the employer鈥檚 scheme allows the employee to 鈥渟pend鈥� more than their benefit allowance. For example, the employee in the previous paragraph might want benefits to the value of 拢2 250, the extra 拢250 (over and above the 拢2 000 benefit allowance) being met by an adjustment to their basic salary. In that case, it is again necessary to decide whether or not there has been an effective reduction in the employee鈥檚 contractual cash pay (see EIM01141).