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Top 5 tax-efficient ways to reward employees

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The recent Reed vs HMRC judgement has many employers looking closely at their salary sacrifice schemes to see if they measure up to HMRC’s criteria. But salary sacrifice isn’t the only way to show your team how much you appreciate them.

A creative approach to reward can keep your people happy and the tax system has a number of employment-related exemptions built in – however it should be remembered that a benefit is only a benefit if the employee actually wants it.

So, sometimes, it is a good idea to ask employees what they would like, or provide some ideas you are considering to see if they are interested.

Here are a few ideas that show how, without spending too much money, you can gain more value through your employee reward system.

1. Salary sacrifice

Salary sacrifice schemes can be a cost-effective way to help employees. Employees give up pay and receive a benefit instead. Often these benefits may have more favourable tax treatment, or they are completely exempt from tax and National Insurance (NI) if certain criteria are met.

Salary sacrifice has been around for some time. Common schemes cover:

  • buying extra annual leave
  • childcare vouchers
  • cycle to work
  • pension payments,
  • workplace parking
  • training (such as an MBA)
  • technology (such as iPads)

So, as the Reed case showed us, providing the arrangements are set up correctly, generally there is a saving to be made on the employer’s NI contributions due on the salary that is sacrificed, currently at a rate of 13.8 per cent.

2. Share schemes

Employee share schemes can reward and provide long-term tax efficient incentives. They can be used to recruit, retain and motivate employees as well as improve staff performance and morale.

There are a number of schemes that allow anything from a small group of key individuals through to the entire workforce to be offered direct shares or share options/incentives in a tax efficient manner. These include one of the most popular employee share schemes, the Enterprise Management Incentive (EMI).

Specifically targeted at small trading companies, EMI options are discretionary so they do not have to be offered to all employees. There are specific statutory conditions that the EMI company and the employee must meet. If options qualify as EMIs throughout, and options are granted with an exercise price equal to the unrestricted market value at grant, there is no income tax or NICs on the exercise of an EMI option.

However, capital gains tax may be payable on the sale of the option shares.

3. Loans

From 6 April 2014, the interest-free beneficial loan limit went up to £10,000 with no tax implications. Such loans are most commonly used for commuter season tickets, but loans also can be used for other employee incentives.

Employers might want to reconsider any current policy or provide additional assistance, by using this limit where funds are used to help employees with raising a home deposit, getting a car or reducing their student loan.

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