Tax Efficient Staff Incentives
It’s natural that employers want to retain their best employees. Underpinning every successful business is a strong staff team. Retention can be more important than recruitment.
The most obvious way to retain and motivate staff is through pay or bonuses.
However, employers may want to provide different types of incentives that motivate differently, and over longer-term horizons. Additional pay is usually the least tax efficient option, generating extra tax and NIC for the employee, and extra NIC for the employer. That said, what are the alternatives? Below we explore some options in more detail.
Share Schemes
Employee share schemes are a popular option. There are benefits for the company and individual.
- Studies have shown that businesses with meaningful (at least 30%) broad employee share ownership are more productive, grow faster and are less likely to go out of business than their counterparts.
- For the individual, research shows that employee-owners have higher wages, higher net worths, receive better benefits, and have higher levels of job security.
The government is keen to promote these schemes, as they are perceived as being good for business and therefore good for the wider economy.
It’s hugely important to make the distinction between approved share schemes, which have tax advantages, and all other non-approved share schemes, which do not.
Approved Share Schemes
There are four main schemes. The first two of which are considered ‘targeted’ schemes, meaning employers typically use them with certain staff in mind such as key senior employees and directors.
- Enterprise Management Incentives (EMIs) allow employees to buy shares in the company at a set price via options. Gains made through the use of options are tax and NIC free. There are restrictions on company activities and size (£30m balance sheet, 250 employees) and the value of shares that options are granted over (£3m). EMI schemes are flexible and the most commonly used schemes for SMEs.
- Company Share Option Plans (CSOPs) allow employees to purchase shares in their company at a set price, usually at a discount. There is no size limit on the company for this scheme so it tends to be used by companies too big for EMI schemes.
The other two scheme types are ‘all employee’ schemes, as they must be offered to all staff to get approval. They are therefore not as popular with SMEs and tend to be implemented by larger, often listed, companies.
- Share Incentive Plans (SIPs) enable employees to buy shares in their company from pre-tax income, and any dividends or capital gains earned on the shares are tax-free. Employers can also contribute additional shares to the plan.
- Save As You Earn (SAYE) schemes allow employees to save money each month over a set period (usually three or five years) to purchase shares in their company at a discounted price. At the end of the savings period, employees can either buy the shares or take their savings back.
Other Staff Incentives
Employers have long used alternatives to pay to help motivate their teams. Commonly referred to as ‘Staff Perks’ these range from the relatively small (typically food and drink treats) to more significant perks, such as health insurance, gym membership or even company cars or accommodation.
The theory is that staff are usually more motivated by the gesture of, say, a bottle of booze or bunch of flowers, than they might be by a £20 cash bonus. When put in cash terms, on the payslip, the £20 can certainly seem like a lesser gesture.
However, employers need to tread carefully. Firstly, from a practical perspective, the wrong type of perk for the wrong person, or overdoing certain perks can leave staff feeling disgruntled – they would simply have rather had the cash. Defeating the initial intention to motivate.
The other area to attend to is what is the tax treatment? It’s likely that most perks an employer provides will give rise to a taxable benefit, and so create a tax liability for staff. However small that liability is, it may irritate staff rather than motivate, especially if the perk wasn’t particularly well targeted in the first place.
So, it’s natural for employers to look for tax efficient incentives. Ideally employees can be provided with something extra as a perk, without any tax or NIC arising. With the added benefit for the employer of not generating themselves an additional employer’s NIC liability either. We cover some of the most tax efficient options below.
- Pension contributions have always been a highly tax efficient option. For those considering making bigger contributions, checks are recommended to ensure that all contributions qualify for tax relief as various limits can apply.
- There are various expenses that employees can claim from their employers tax free. Many employers pay these expenses to their employees already. But those that do not are missing out on tax-efficient ways to remunerate their staff. The most common expense claims are for business mileage (45p a mile) and for working from home allowance (£312 per year) but there are many potential expenses that could apply. Again, checks are recommended that payments fall within tax allowability rules.
- Staff parties. Employers can spend up to £150 per head, per year, on staff functions without triggering any tax.
- Providing staff with company cars is typically very tax inefficient. However, providing staff with very low emissions cars, ideally zero CO2 emissions cars, is still tax efficient. The tax the employee will pay on the car benefit of an electric car might be just a few hundred pounds a year. Whereas on a traditional petrol or diesel car, the tax payable on a car benefit can easily be thousands of pounds a year.
- ‘Trivial benefits’. HMRC say perks that cost less than £50 can be ignored for tax. However, two crucial caveats apply to this exemption. These perks can neither be a reward for performance, nor can they become customary/expected. An unexpected bunch of flowers for a staff member should be covered. A reward for hitting targets would not. Nor would an annual birthday gift given to all staff, as that is established as expected.
- ‘Cycle to work’ scheme enables staff to be provided with bicycles, tax free, provided the bikes are mainly used for commuting to work.
This article touches on a wide range of tax points, none of which are covered in detail. Employers who are considering changing their staff rewards packages should seek formal tax advice before taking action. If you are an employer considering the best ways to retain and motivate your team, get in touch and we can help you consider your options and build in tax efficiency into your staff offering. You can either call us on 01482 888 820 or email beverley@sowerby-llp.co.uk