Alternative Ways of Paying Staff Tax-Efficiently

Alternative Ways of Paying Staff Tax-Efficiently

Despite the reduction in National Insurance contributions (NICs) in Spring Budget 2024, more employees are paying tax at higher rates on their earnings due to the freezing of tax thresholds. Some may find that any pay rise or bonus attracts additional tax and NICs such that the net pay increase is minimal.

 

Benefits Packages

However, it is possible to put together a package of non-cash tax-efficient benefits to reward employees, so that they are better off. Such benefits can include employee parking, staff discounts, holiday buy back, birthday vouchers, Christmas gifts, help with additional homeworking costs, employee suggestion schemes (where tax and NICsfree cash rewards are given to employees to share their ideas, suggestions and solutions to enhance the operations, processes, products or services of a company), and interest-free loans.

Although the tax and NICs advantages of salary sacrifice schemes were largely withdrawn from 6 April 2017, such arrangements can also prove taxefficient in certain circumstances.

 

Salary Sacrifice Schemes

Salary sacrifice schemes are arrangements between an employer and an employee where the employee agrees to give up part of their salary in exchange for specific non-cash benefits. Most arrangements fall within the rules whereby the benefit’s taxable value is calculated as greater than the cash given up and the taxable value under the usual benefitin-kind rules.

The only salary sacrifice arrangements that can be provided with no tax implications are:

  • employer pension contributions to registered plans;
  • employer-supported childcare (only if the employee joined the relevant scheme before 4 October 2018); and
  • cycle to work schemes.

Since April 2017, employees have been required to pay tax and NICs on salary given up under any other salary sacrifice schemes or flexible benefit schemes.

However, salary sacrifice arrangements for the leasing of electric vehicle cars (EVs) are becoming increasingly popular. These arrangements are tax and cost-effective because EVs attract a low benefit-in-kind charge – the rate for EVs is 2%, and the government has outlined that it will not increase above 5% until after 2028.  In addition, most agreements include road tax insurance, roadside assistance and maintenance, so the employee will only have to pay for the day-to-day fuel or charging running costs.

 

Share Incentive Plans

Share incentive plans are often used as part of an overall compensation package made available to employees of limited companies, and provide employees with an ownership stake in the company.

These plans are increasingly being used in place of a pay rise or bonus to reward employees by offering free shares or opportunities to purchase shares at favourable terms. Free shares can be awarded to all employees in any tax year valued at up to £3,600 per employee at the time of the award. They either all receive the same number of shares, or the allocation can be set by reference to objective criteria such as remuneration, length of service or performance. Employees can also be invited to buy shares via deductions from salary of up to £1,800 or, if lower, 10% of salary each year.

The shares must be retained within the plan for five years to ensure no income tax or NICs is payable on their value; capital gains tax will also not be payable if kept within the plan until sold. The company saves employer’s NICs on this amount.

 

Practical Tip

Non-monetary rewards can produce more significant advantages for the employee than cash payments; they have an immediate impact and are not reduced, with up to 57% going to the government in tax and NICs. Extra leave, time to do volunteer work and opportunities to attend courses and workshops (whether work-related or not) are all benefits-in-kind that can make the employee feel valued in the workplace at a low cost to the employer.

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