Insights

Having to freeze staff pay or reduce benefits is one of the realities of running a business today and not uncommon. According to the CIPD, over 50% of companies have had to either cut employee pay levels or freeze them over the past 18 months. Adding further complexity to this issue is the ongoing increase in people being taxed at the 40% rate. It means that many employees are worse off and if you are lucky enough to be able to offer staff a small salary increase, its impact may be minimal. The point at which employees will be taxed at 40% is £32,011 for the 2013/2014 tax year, and will drop again to £31,866 for 2014/2015. Since giving staff perks is economically difficult at the moment, businesses need to get a bit more creative with the range of benefits they offer.

Perk idea 1: Offer tax free loans to employees
One way to help employees is to allow them to take full advantage of tax efficient loans and schemes supported by the Government. The latest initiative to be introduced comes into effect in April 2014 and allows employers to give their staff a low or no-interest loan to the value of £10,000 in any single tax year, without it being treated as a benefit in kind and taxed accordingly. Provided the loan is eventually re-paid in full, no tax is payable by the employee.

Perk idea 2: Help reduce tax bills with salary sacrifice schemes
Other ways employers can help staff to take home more money without increasing their salary is by being flexible about offering ‘salary sacrifice’ schemes. These allow certain services to be paid for using gross salary; therefore reducing the amount of income remaining that is taxable. The net effect for the employee is that the cost of the goods or services in real terms is lower, since they would have had to pay tax on a portion of the cost before making the purchase.

Higher rate taxpayers in particular will benefit from salary sacrifice as a very cost effective and tax efficient way to get access to services, because the impact of the tax reduction on the purchase cost is greater.

What purchases can be made using salary sacrifice?

Childcare vouchers, used to pay for nursery fees or holiday club activities, are an example of a salary sacrifice scheme whereby each taxpayer in the family is eligible for £55 worth of childcare, paid for using gross earnings. The ability for higher rate tax payers to enter this scheme has been restricted but all existing users remain unaffected and can continue to benefit from up to £440 a month of tax free childcare.

Other common benefits that can be offered as salary sacrifice include pension contributions and certain car schemes. It is important for employers to review salary sacrifice schemes carefully before offering them. This is because to be effective, they require amendments to employee contracts and therefore employment law issues and minimum wage issues can arise. There are also very important implications for employees to consider, e.g. the impact on benefit entitlements.

It is therefore important to take professional advice before setting up and implementing a scheme – this will ensure that all parties are fully aware of the implications.

Low emission company cars are tax efficient perks
Company cars have fallen out of favour recently as benefits in kind due to the high levels of tax involved. However, it is possible to have a relatively low benefit if the employee is provided with a vehicle that qualifies as environmentally friendly. The benefit in kind on a company car is determined by the list price of the car, combined with its CO2 emissions. For example, if the car has a zero emission level there is a nil benefit in kind charge and those cars with very low rates of emissions will attract a much lower tax charge.

There are significant tax savings available to employers if they purchase zero or low emission vehicles for their employees, so the market and level of choice has expanded considerably, with the result that employees are being tempted back by the type of cars available and the reduced tax costs.

Another option to consider is ‘holiday buyback’. Due to time pressures and workloads, employees can’t always manage to take all their allowed days of leave. Instead, some companies allow staff to carry forward their days but this can mean too many days to allocate for the following year, resulting in service issues. As an alternative, employers can offer to ‘buy back’ any unused annual leave and give the employee the difference in their pay. By combining this with a salary sacrifice scheme, this could become another tax efficient route to make otherwise expensive benefits available to employees. Although holiday buyback will not be suitable for every company, it is a decent benefit and in the right circumstances, can be made relatively tax efficient.

The point to take away from all this is that there are many ways a company can help its staff to have access to more benefits and possibly even more disposable income, without having to give them an increase in pay. As the starting point for the 40% tax rate has reduced, it may be more beneficial to consider alternatives, which mean more income in real terms because of lower taxes and a win-win for employers and employees. If you are interested in finding out more about tax efficient perks and implementing salary sacrifice at your company, please contact Anne Eager by emailing ae@rjp.co.uk.