Rewarding Employees… without bankrupting the employer? Take some of the Taxman’s slice back!

The cost-of-living crisis, alongside constant news headlines covering strikes and pay awards, is heaping pressure on employers to increase employee remuneration. Attracting and retaining the best employees is a constant challenge in a low-unemployment economy, and employees’ perception of benefit packages can make a big difference to satisfaction levels. 

Following on from our article on tax-efficient profit extraction for owner managers, this article is a round-up of the opportunities available to reward and retain employees in a tax-efficient manner. These opportunities are available to all types of entities including limited companies, partnerships, and sole traders, unless otherwise stated.

Trivial Benefits – Businesses can give all employees small gifts free of tax and National Insurance (“NI”). Each gift can be up to £50 per person (including any VAT if appropriate). A basic rate employee would have to earn about £75 to take home £50, and a higher rate tax employee would have to earn £86, so the value of the benefit is much higher than the cost to the employer.

Some examples include Christmas and birthday gifts, a team lunch out (costing less than £50 per head on average), an Amazon voucher to mark the anniversary of the founding of the business or a supermarket gift voucher towards food for a Bank Holiday barbeque.

There is no limit to the number of awards to employees who are not also directors, but it is important that they are not seen as reward for services and that they don’t become too regular. There are a few other important conditions to be met, so please consult your usual RG contact for details.

Mobile phones – Employers can provide employees with a mobile phone for work use without giving rise to a taxable benefit. Incidental private use is accepted. With the latest iPhone costing £80 per month on a 24 month contract, a higher rate taxpayer will have to earn £138 per month to generate the take home pay to buy the same phone; £3,310 over the 24 months. The phone will cost the employer £1,600 over the 24 months by the time they’ve reclaimed the VAT. The employee receives significant value, the cost to the employer is less than half, and the taxman doesn’t get a penny of it.

Laptops – similarly, employers can provide a laptop to each employee without giving rise to a tax benefit. The laptop must be for work use, but incidental personal use is accepted. To put numbers around it, an Apple MacBook costing £1,350 would cost the employer £1,125 net of VAT reclaim. A higher rate tax employee would have to earn over £2,300 to purchase the same laptop out of net salary.

Bikes –the Cycle to Work scheme can be used to provide employees with cycles and helmets tax free with a similar cost / benefit profile to laptops and phones. Since the employee must be able to demonstrate that they use the bike for work or commuting, this can also be a good way to encourage employees to come into the office. There are a few options, as well as some important criteria to be met.

Medical check-ups, eye tests and glasses – under Health and Safety regulations for display equipment use, employers are obliged to pay for employees to have an eye test each year. This is a tax-free benefit. An annual health check can also be paid for by the employer without a tax charge.

Electric cars – offering a diesel or petrol company car is a thing of the past for most employers, but offering electric cars via a salary sacrifice scheme means that employees can benefit from their vehicle out of their pre-tax income, with only a very low (currently 2%) ‘benefit in kind’ tax charge in return. Employers save employer’s NI on the salary sacrificed, so there are savings for both parties. An employee earning £60,000 and sacrificing £500 a month for an electric car would save tax and NI of £2,520, so the effective cost of the car to them would only be about £350 a month even after the benefit in kind charge. The employer would save £830 a year in employer’s NI.

Pension contributions the most tax efficient way – there’s nothing new about pension contributions; almost all employers have to operate a scheme. However, if you don’t currently operate your scheme via salary sacrifice, it’s worth considering switching. This is because you will save the employer’s NI on contributions, and the employees will save employee’s NI too. That’s not necessarily the case with other deduction methods.

Skin in the Game – If the employer is a limited company, giving employees share options can encourage them to act in alignment with the business, help with retention and lead to an extremely tax efficient payout if the company is the subject of a sale or transaction. It is also possible for options to be converted into shares on non-sale events. The Enterprise Management Initiative (“EMI”) scheme is ideal for the purpose and can be combined with Growth Shares to reward employees for growth from the time they become option holders. 

Incentive Schemes – all the above tax efficient remuneration ideas preclude giving employees cash. However, these last two schemes do allow cash payments. The first is very small; the “Employee Encouragement award” allows a payment of £25 to reward special effort. It can be effectively used for “employee of the month” type recognition.

The second scheme – “Financial Benefit Awards” – allows a tax free payment of up to £5,000 to an employee who makes a suggestion which could lead to your business making or saving money. The amount paid can be any amount up to 50% of the saving or additional income you expect in the first year, or 10% of the amount you expect over 5 years, up to £5,000. The amount paid is at the employer’s discretion.

There are conditions to be met, especially for the financial benefit awards, so please do check with us if you would like to know more.

Sophie Glenton Smith

Communicating the benefits

The success of these suggestions can be measured by the appreciation from employees, and the value they attribute to their overall remuneration package and benefits, rather than just their salary. It can help to put numbers around it, similar to our examples above. If you would like a member of your RG team to prepare a personalised illustration of the value of the benefit package you offer, or if you would like to explore new benefits, we’ll be delighted to hear from you.

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