Collective agreements and employee allowances – are they taxable or exempt?

By Christel Townley

Many companies pay a variety of allowances to employees, often to reflect the conditions the employees are required to work in or to reflect costs they incur in their role. These may be administered through an employee’s independent employment agreement or through a union collective employment agreement.  There are circumstances when these allowances can be treated as exempt from tax and circumstances when they should have PAYE withheld.  

Union collective agreements in particular are constantly being renegotiated with the relevant union, usually every two years, and in many cases this involves an update of the rates for allowances specified in the collective agreement and little else.  As a result the corresponding pay types in the payroll system are rolled forward without a review of the tax treatment of these allowances and the payments continue to be processed as they have been historically. 

We have found that many agreements are silent on whether the allowances are to be treated as taxable or tax-free.  Or in the situation where tax-related clauses are included in the agreements, they can be at odds with the legal requirements under the Income Tax Act. 

There may be opportunities to consider how to structure these payments in a tax efficient manner and equally, as the tax legislation develops over time, some allowances that have been treated as non-taxable in the past may need to have PAYE withheld due to changes in the income tax legislation over time. 

The two most common types of allowances paid under collective agreements are shift allowances and meal allowances.  We have seen a number of cases where meal allowances in particular have been treated as non-taxable for a number of years.  However there are specific rules which govern when meal allowances can be treated this way.  These apply after an employee has worked two hours of overtime on the day of the payment, which in turn then requires consideration of what shift pattern the employees are working, particularly if the allowance is specified as being paid after a certain number of hours of work.  This is not to say that allowances cannot be paid when they do not meet the overtime meal allowance requirements, it is just that they should be taxed if the payment is made before two hours of overtime has been worked. 

There could also be opportunities for shift allowances to be paid tax-free to reflect a reimbursement to employees for additional transport costs, depending on the time of day the shifts operate and an absence of adequate public transport for the employees’ commute between home and work.    

Often a myriad of other allowances are also paid and consideration should also be given to the tax treatment of these as they can include a range of taxable and non-taxable payments. 

The tax treatment of allowances can lead to flow-on effects on other income-tested schemes such as child support deductions, student loan deductions or Working for Families Tax Credits.  Consequently, it is important to ensure the correct tax treatment is applied when the payroll is processed.

We recommend reviewing the tax treatment of allowances that are paid to employees and if you have any questions in relation to the above or wish to explore the details further, please do not hesitate to contact your usual Deloitte advisor.

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