Employee Benefits – A Cost Effective Route to Rewarding Your Workforce
By using tax efficient, flexible employee benefits you can deliver greater actual value to your employees without necessarily increasing costs. This enables you to keep up with the competition in attracting and retaining your top talent.
In addition to considering the usual tax-efficient benefits, employers can design benefits packages which provide what employees really want without costing the employer a fortune. These include:
- diversifying the reward structure to include other forms of remuneration such as shares, securities or options
- using salary sacrifice for pension contributions, childcare vouchers and other tax or National Insurance Contributions (NIC) favoured benefits
- introducing voluntary benefits where employers can use their purchasing power to obtain reduced rates for benefits employees want
Long-term reward structures are recognised as being effective in attracting and retaining talent. Such rewards can also be of significant value when:
- growing a sustainable and profitable business
- aligning employee interests with those of the company by giving them a stake in the business
- and offering a deferred gain linked to performance targets.
Employees can be offered shares, or the option to acquire shares at a future date. Certain other types of incentive awards may be structured with the gains taxed at the lower capital gains tax rates, giving the employees more money in their pocket.
In addition to motivating the workforce, some plans can have monetary benefits for the company by having no requirement to pay employer’s NIC on rewards. Some equity-based rewards can also offer further valuable corporation tax savings for companies.
Enterprise Management Incentive
A popular tax-efficient scheme for smaller entrepreneurial companies is the Enterprise Management Incentive (EMI) share option scheme. EMI options can be granted to employees on a discretionary basis. This gives the employee the right to purchase shares in the company in the future at a price which is agreed at the time the options are granted.
The terms under which the employee can purchase the shares in the future can be designed to align with the interests of the business. For example, using performance targets or only permitting exercise of the options immediately prior to a company sale or flotation.
EMI plans have no tax charge for the company. In addition, the company will often be entitled to a corporation tax deduction for the growth in value of the underlying shares. For the employee, the growth in the share value, above the value when they were granted the option, will be subject to the lower rates of capital gains tax. This is instead of income tax and any potential NIC when they ultimately sell the shares.
EMI is just one of a variety of discretionary tax-efficient incentive plans. If EMI is not the right solution for your business, there are bespoke plans available. These can be designed to meet the commercial objectives of a business whilst still delivering favourable tax benefits.
Although in most cases there is income tax relief for pension contributions there is no relief for NICs. However, NIC savings can be achieved via salary sacrifice arrangements whereby the employee agrees to take a reduction in salary and the employer makes an equivalent contribution to the pension scheme.
Salary sacrifice arrangements for other tax-favoured benefits can also achieve both tax and/or NIC savings. Approval should be sought from HMRC to ensure that the relevant conditions for salary sacrifice are met. Additionally, care should be taken since salary sacrifice may not be beneficial for all employees.
Where an employer cannot afford to offer benefits, it can offer a voluntary arrangement instead. This is where the employee pays the costs but still benefits from the employer’s bulk buying power. This often applies to common insurance benefits.
No single benefit structure will motivate or suit every individual. Using a range of awards, benefits and flexible packages can reflect the diversity of a workforce. Potential benefits should be accurately targeted and communicated to staff as a benefits package is only really worth what the employee thinks it is worth.
For further details on Employee Benefits, please get in contact with a member of our Tax Services Team or call 01903 234094.