In the back end of 2021, the government announced various measures in attempts to address the social care funding shortage and help to boost the wages of those on low incomes. However, in doing so, employers are bearing the brunt of this through the cost of increasing labour.
First, in September 2021, the new Health and Social Care Levy was announced, which effectively adds 1.25 percentage points to the rate of National Insurance Contributions (NICs) paid by employers and employees.
Then, in October 2021, the government then announced an increase in the rates of National Minimum Wage and National Living Wage, with the National Living Wage increasing by 6.6% to £9.50 per hour from 1 April 2022.
Now, on top of this, the UK is seeing a 30-year high in the rate of inflation, which may force employers to increase wages so their employees’ wages don’t fall behind rising prices.
All of these recent developments together put a large amount of pressure on employers and increase the cost of paying their staff. It is important the employers consider tax efficient ways to remunerate and reward their employees to keep on top of this rising cost.
In addition to traditional employees, Limited Liability Partnerships may also wish to consider possible mitigations with regards to any salaried members; particularly given that two of the three conditions for meeting the salaried member rules are often revisited at the end of March and beginning of the tax year, respectively. You can read more about the salaried member rules here.
A well-known tax efficient way of rewarding employees is by making contributions on their behalf into a registered pension scheme. Contributions made by an employer are not subject to income tax or NICs.
In addition, if pension contributions are made via a salary sacrifice arrangement, they are even more tax efficient from the employee’s perspective, especially when considering the new Health and Social Care Levy.
Care should be taken to consider the Annual Allowance and Lifetime Allowance of employees before making decisions on the level of pension contributions made on behalf of employees.
Some employees may want more immediate reward for their services and so, other benefits can also be considered. Providing benefits, such as private medical insurance, gym memberships or company cars, instead of paying additional cash to employees may be more efficient for the employer, although the amount of the taxable benefit for each of the benefits will need to be considered.
One method through which significant savings can be made is via salary sacrifice arrangements. Since 2017, the benefits of salary sacrifice arrangements have been withdrawn for most benefits. However, two particular benefits where large savings can still be made are for electric company cars and cycling equipment through the Cycle to Work scheme.
The benefit in kind rates for fully electric company cars are very low: 1% of the list price of the car for 2021/22 and 2% for 2022/23 through to 2024/25. An employee exchanging cash salary in return for an electric company car can provide large tax and NICs savings for both the employee and employer. You can read more on this in our insight here.
Cycle to Work benefits are also still very tax efficient, so this is a smaller reward that can be provided to employees who are within cycling distance of the office.
Certain benefits provided to employees are exempt from income tax and NICs. Trivial benefits are one such category of exempt benefits. A benefit will qualify as a trivial benefit if it costs the employer no more than £50, it is not cash or a cash voucher, and it is not contractual or a reward for services performed by the employee.
Gifts such as chocolates, flowers or vouchers for birthdays, weddings, festive occasions etc, are all examples of when the trivial benefits exemption may apply. While only small amounts, these gestures can often boost employee morale while still efficient from a tax perspective.
Instead of rewarding employees with cash or tangible benefits, employers may instead to reward employees through the issuing of shares in the company or perhaps options to acquire shares in the company.
If set up correctly and qualifying conditions are met, some employee share schemes are extremely advantageous from a tax and NICs position. In addition, they can also provide a useful way to attract and retain employees who will have a vested interest in the business performing well to maximise their return on the shares in the future.
You can read more about the operation of share schemes in our insight here.
The majority of this insight talks of financial rewards and incentives that employers can offer employees. However, over recent years – particularly during the pandemic – many employees have realised that their work-life balance can be as important to them as financial reward.
With this in mind, if employers are looking for ways to reward employees, but are struggling to finance additional costs or benefits, employees may well value flexible working and a greater work-life balance just as much as a financial reward.
Some employers have brought in extremely agile working patterns that fit around employees’ personal preferences and circumstances, some have reduced working hours on particular days, and others are arranging more small, ad hoc social occasions during working hours. Each suggestion will suit some employers more than others, but they can boost morale and productivity in the long run without having to spend lots of additional money on pay increases or benefits.
In summary, there are many ways in which employers can
reward employees and salaried members in a more tax efficient manner. In the
face of increasing labour costs, some of these methods may become even more
attractive for both employers and employees to mitigate the increased costs.
All employers should review their remuneration and reward
packages on offer to consider whether changes can be made to reduce overall
costs while ensuring employees are sufficiently rewarded.
If you would like to speak with us about how to reward your
employees in a more tax efficient manner, or have any other employment tax
queries, please contact Andy Hamman.