Employee Incentives – What to Consider from a Tax Perspective

A fresh carrot dangles off of a stick.

Attracting, engaging and retaining people within your business is key especially when your staff are your most valuable asset. This has become quite a challenge for a lot of recruitment businesses, which is always a surprise considering that’s what they do day in day out for their clients. Great consultants are hard to come by and offering an attractive remuneration package is an important element that helps differentiate you from your competitors. Below is a list of our top 6 tips on incentive packages and their tax implications:

 

1. Salary Sacrifice:

 

A salary sacrifice benefit is a tax efficient way where an employee gives up part of their salary and in return the employer gives a non-cash benefit. The employee’s overall salary is lower, resulting in them paying less tax and national insurance and the employer pays less employers national insurance.

 

There have been some recent changes on the type of benefit available through salary sacrifice. These have now been restricted to:

 

  • Childcare vouchers (financial support for registered child care)
  • Cycle to work schemes
  • Ultra-low emission vehicles (CO2 emissions below 75g/km)
  • Pension contributions
  • Retraining courses
  • Other intangibles e.g. buying annual leave

 

2. Company Cars:

 

If a company car is provided to an employee then the employee will have to pay tax and national insurance on the value of the benefit. The employer will also be required to pay Class 1A national insurance.

 

The value of the benefit depends on the value of the car, type of fuel and whether the employer pays for the fuel. This value can be reduced if the car has low CO2 emissions (below 75g/km), the employee contributes to the purchase of the car or the car is used part-time. HMRC provide a useful company car and car fuel benefit calculator – follow this link www.gov.uk/calculate-tax-on-company-cars.

 

Generally, I would not recommend providing fuel for your employee as the tax consequences for the employee would outweigh the benefit unless the employee plans to do significant amount of private mileage each year.

 

In some cases, an employer may consider providing a car allowance instead of a company car. Effectively this is a lump sum added to the employee’s salary and taxed in exactly the same way as salary and bonuses.

 

3. Mobile Phones:

 

Providing your employees with a mobile phone is an exempt benefit, therefore no tax consequences for the employee or employer and all costs are fully deductible from the business. This is providing that the phone contract is between the employer and supplier and only one phone is provided per employee.

 

4. Travel:

 

Reimbursement of travel costs to the employee’s main place of work is a taxable benefit. However, specifically for London based recruitment businesses, some employees may find it difficult to stump up the cash for the ever-increasing train season ticket. As an employer you can help bridge this cashflow issue and provide an interest free loan. There is no taxable benefit of providing employee loans of less than £10,000.

 

5. Entertaining:

 

Taking the staff out for Friday night celebratory drinks or a weekend in Paris are very common perks to being a successful recruitment consultant. HMRC allow each business £150 per head for annual staff events, when this amount is exceeded there are tax consequences for such staff events.

 

Generally, these costs must be reported on a PSA (PAYE Settlement Agreement) every year and the employer pays the associated tax and national insurance. The employee will not suffer any tax consequences.

 

Tax on entertaining costs can be complicated so if you are planning an event I recommend you seek professional advice to ensure you are as tax efficient as possible.

 

6. Shares:

 

For those key consultants or management team that you would like to tie into the business, share options may be the way forward. There are many different share schemes to consider and I would always recommend seeking professional advice to ensure your objectives are met. The most popular are:

 

  • EMI Share Option Scheme – An option is a right to acquire shares in a company at a future date for a specified price.
  • Phantom Shares – No shares are exchanged, this is effectively a deferred bonus arrangement based on set circumstances or an event such as exit.
  • Growth Shares – Employees are awarded with actual shares but they could have different characteristics to ordinary shares.

 

More details on these share schemes can be found in our Brief Guide To Long Term Incentive Plans which includes a case study on an EMI Share Option Scheme.

 

If you would like further information about our top 6 tips on incentive packages and their tax implications, please contact Marie Pegram.