January 2013 saw another above inflation increase in season ticket prices for the 10th year running. The average increase is 4.3%. How will this affect employees?
The above inflation increase in season ticket prices will be a blow for employees struggling to make ends meet out of non-existent, or very small wage increases. The Office of Rail Regulation reports that the cost of an annual season ticket has increased by around 50% between January 2004 and January 2013. The Hay Group PayNet UK Salary Tracker found that among lower paid office workers, an annual season ticket now swallows up nearly a quarter of their gross salary. For many commuting to London from the South-East it is even more.
Some employers offer employees season ticket loans to help them spread the cost of commuting throughout the year. Under section 180 of the Income Tax (Earnings and Pensions) Act 2003 there is no taxable benefit if an employer loans an employee no more than £5,000 at any one time during the tax year in question (whether that’s in one or more loans) at a rate of interest that is less than the official rate, currently 4% for the tax year 2012/13.
Up to now a maximum amount of £5,000 by way of an interest free (or very low interest) employment-related loan was sufficient to cover most annual season tickets. That is not necessarily the case from January 2013.
An annual season ticket from places such as Bournemouth, Peterborough, and Kettering in Northamptonshire, into London, already well exceeds £5,000. Other annual season tickets into London from places such as East Kent, the South Coast, Colchester, Huntingdon, Oxford, and Cambridge are approaching £5,000. The £5,000 de minimis limit will certainly soon be exceeded with continuing above-inflation increases expected over the next few years.
Therefore, where an employer loans an employee more than £5,000 at any one time during the tax year, there will be a taxable benefit. The cash equivalent value of this benefit is the average amount of interest calculated on the loan at the official rate less any interest required to be paid, and actually paid, on the loan by the employee.
For example, where an employee borrows £5,100 by way of an interest-free season ticket loan over the tax year 2013/14, and repays the loan each month in equal instalments, the cash equivalent value of the loan will be £102, assuming an official rate of interest at 4% for the whole of the tax year.
As can be seen, although the additional income tax payable on the above benefit (£20 a year (40p a week) for a basic rate taxpayer; £41 a year (80p a week) for a higher rate taxpayer) is not that great, nevertheless the value of the benefit will grow as season ticket prices go on increasing, and more and more employee find themselves caught in the employment-related loan trap.
Both the above inflation increase in commuting costs and the potential for an additional taxable benefit in kind will all apply pressure on wage demands.