Recognising and rewarding employees is integral to business success, often correlating with increased productivity. Beyond mere productivity, efficiently rewarding employees can serve as a powerful motivator, enhancing their realization of benefits in the form of augmented disposable income. In this context, we aim to elucidate why incorporating housing allowances into the employees’ remuneration structure may not align with tax efficiency. Throughout this article, terms denoting the masculine shall be construed to include the feminine.
A housing allowance is money given to an employee by the employer to cater for or to cover any housing or accommodation costs or expenses incurred by an employee. In this instance, it is also critical to highlight the alternative to such an allowance being a housing benefit. As alluded to above, the housing benefit is essentially an alternative to a housing allowance and it technically arises when an employer provides an employee with employer-owned or rented accommodation e.g., a company house that is granted to a bank manager. Having clarified what entails a housing allowance and its alternative, we shall now discuss how and why a housing allowance is not a smarter option.
The housing allowance refers to funds provided by an employer to cover an employee’s housing or accommodation-related costs. It is essential to underscore the existence of an alternative to this allowance, known as a housing benefit. As previously mentioned, a housing benefit comes into play when an employer offers an employee accommodation owned or rented by the company, such as a company-provided residence for a bank manager.
Now that we’ve delineated the concept of a housing allowance and its substitute, we will delve into an examination of why opting for a housing allowance may not be the most prudent choice.
To begin, it is crucial to clarify that both a housing benefit and a housing allowance are subject to taxation for the employee. However, the tax calculation differs between the two. In the case of a housing benefit, the taxable amount hinges on whether the property is rated (typically in towns and cities) or non-rated (commonly in tribal areas). For employees residing in non-rated properties, the tax is determined by the current capital valuation, calculated as 8 percent of P 250 multiplied by the floor area of the house. Conversely, for rated houses, the taxable benefit is 10 percent of the municipal valuation, provided by the local municipality governing the house’s location.
Contrastingly, housing allowances do not entail such specific calculations; they are fully taxable without any special rules.
Numbers don’t lie
Now to put everything into perspective, let us have a look at the illustration below. Let’s assume that an employee who pays rent of P10,000 is paid a monthly basic salary of P20,000 plus a housing allowance of P10,000 (to cater for the rent expense). The monthly tax on such income is P5,338 on the total income of P30,000 and the net salary becomes P24,663. Since the employee pays rent of P10,000, this technically means that his actual disposable income is P14,663.
On the other hand, if the employee agrees with the employer to reduce his earnings by the P10,000 housing allowance in exchange for an employer-rented house, his salary will decrease to P20,000 per month. If the employee occupies an employer-rented house in say Tlokweng measuring 150 square meters, he will be liable to tax on the monthly housing benefit of P250 determined as follows: 8 percent*P250*150 square meters, the result being divided by 12 months. This technically means that the same employee will suffer a tax of P2,900 on the total income of P20,250 (salary plus housing benefit) and effectively have disposable income of P17,100. From that analogy, the employee who occupies an employer provided house pays less PAYE and in addition, takes home more by P2,437 per month (P17,100 – P14,663) than the one who gets a housing allowance. Now, that makes housing benefits more tax-efficient than allowances.
Well, folks, we hope that was insightful. As we the two Yours Trulies say goodbye, remember to religiously pay your taxes. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send us a text at +267 71 81 58 36. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.