Tax Efficient Ways to Reward Employees

The tax system has a fair number of employment-related exemptions built in. Many have underlying political aims and seek to encourage what is perceived to be desirable or responsible behaviour. Exemptions for green travel fall into this category. Nonetheless, regardless of the reason for their introduction, the exemption can be utilised to reward employees in a tax-efficient manner.

It is important to note however, that a benefit is only a benefit if the employee actually wants it. Many employers allow the employee to tailor his or her remuneration package by giving up salary in return for a benefit. That way the employee receives benefits that he or she actually wants and, where the benefit is exempt from tax and National Insurance, saves the tax and National Insurance that would have been paid had the employee taken the salary and funded the benefit from his or her post tax and National Insurance salary.

However, salary sacrifice schemes are not without complication. To be effective, the employee must give up the higher salary for good in exchange for the benefit. If the employee has the right to revert back to the higher salary at will, HMRC will tax the employee as if the higher salary had been received. Where using salary sacrifice schemes to take advantage of exempt benefits, it is important therefore that the documentation is watertight and makes it clear that the switch from a higher salary to a lower salary plus benefits is a permanent one.

There are a wide range of exempt benefits that can be used to form part of a tax efficient remuneration package. Some of the more popular ones are considered below.

Childcare

The high cost of childcare means that working parents are likely to value highly any help towards the costs. The provision of childcare vouchers is an effective way to take advantage of the exemptions on offer. Employees can be provided with childcare vouchers of up to £55 per week of care without triggering a tax liability.

If an employee gives up a salary of £2, 915 a year (£55 x 53 weeks) in exchange for childcare vouchers, the employee will save tax and National Insurance. The amount saved will depend on the employee’s personal circumstances. For example, if the employee pays tax at 22% and National Insurance at 11%, the employee will save tax of £641.30 and National Insurance of £320.65. Gross salary of £2915 would equate to a net salary of £1953.05. This means that an employee who takes the salary can `purchase’ childcare of £1935 from £2915 of salary whereas the employee who gives up the salary in exchange for vouchers receives the full £2915 of childcare. This is certainly a worthwhile swap.

The same principle can be applied to the provision of other exempt benefits, including exempt childcare provided by means of a workplace or commercial nursery or childminder. In all cases, the terms of the exemption must be met.

Pension Provision

An employer-provided pension can be a significant benefit. Employers can make contributions to occupational or personal pension plans without triggering a tax charge. This can significantly enhance an employee’s remuneration package and is a tax efficient way of rewarding employees.

Mileage Allowances

The system of statutory mileage allowances enables an employer to make tax-free mileage payments to employers. This can amount to quite a significant tax-free sum. The allowance can be paid in respect of cars (40p per mile for the first 10,000 business miles and 25p per mile thereafter), motor cycles (24p per mile) and cycles (20p per mile). If these sums are not exceeded there are no reporting requirements. If higher amounts are paid, the excess is taxable and if lower amounts are paid, the employee can claim tax relief on the shortfall.

The employer can also pay tax-free passenger payments of 5p per passenger, per mile, provided that the passenger is also an employee for whom the journey is a business journey. Again, any excess is taxable. However, the employee cannot claim relief if the employer does not make a passenger payment or pays an amount less than 5p per mile.

Other Transport, Travel and Subsistence Exemptions

Continuing the transport theme, there are a variety of other tax-free options available. The first of these is workplace parking. The employer can provide an employee with a parking space for a car, motorcycle or other cycle without giving rise to a tax charge. In city centre locations particularly, this can be a valuable benefit, predominantly for private purposes.

If an employee travels in the course of his or her work, the employer can pay a tax-free allowance of up to £5 per night in the UK, and £10 per night abroad to cover incidental expenses. If the employee travels a lot, this can add up.

Some exemptions require a greater capital outlay on the part of the employer. Within this category is the provision of a works transport service, whereby the employer provides a bus or minibus service to transport employees to and from work and the employee effectively enjoys tax-free home to work travel. This can generate significant savings for the employee. Employers without the resources to operate such a service can achieve a similar result by subsidising a public bus service.

Employers who are keen to encourage their employees to keep fit can provide cycles and cycling safety equipment tax-free.

Other more limited transport-related exemptions include travel and subsistence during public transport strikes and travel home as a result of late working or the failure of car sharing arrangements, as well as home to work travel and the provision of cars for the disabled

Education and Training

Education and training can be a significant benefit, reaping long-lasting rewards for the employee. Provided that certain conditions are met, the employer can provide work-related training and individual learning account training tax-free.

Recreational Benefits

Perhaps more popular are the exemptions for recreational benefits. These include the ability of the employer to provide sporting or other recreation facilities tax-free provided that certain conditions are met. This would cover, for example, a workplace gym, provided that the facilities were not made available to members of the public generally.

Also within this category is the well-known exemption for annual parties and functions. The employer can provide functions to a total cost of £150 per head without creating a tax liability.

Entertainment provided by a third party is tax-free, as long as the employer has not procured its provision and it is not being provided in recognition or anticipation of services.

Removal Benefits

In the event that an employee moves house because of changes in his or her job, the exemption for removal benefits and expenses enables the employer to provide tax-free assistance to the tune of £8,000. As with all exemptions, certain conditions must be met.

Miscellaneous Benefits

In addition to the benefits outlined above, there are a number of benefits which can be provided to employees tax free and which can be used as part of a tax efficient remuneration strategy.

These include the provision of free or subsidised meals, use of a works bus service, meals provided to cyclists on cycle to work days, eye examinations, overseas medical treatment and a tax-free allowance to home-workers of £2 per week.

Conclusion

The provision of exemptions within the tax system allows employers to exploit these exemptions to reward employees in a tax efficient manner. The employee’s remuneration package can be tailored to include benefits of value to the employee.

In planning any remuneration strategy, the value of exempt benefits should not be overlooked.

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Tax Tips

Problems with Profits, Dividends and Waivers?
Are you having problems with distributable profits, dividends, and waivers? There may be another way – ask your Tax Adviser about the tax treatment of loans from the company which are then written off.

Keeping Records.
Start keeping records and invoices before you start trading – most of the expenditure that you incur will be an allowable expense once you open for business.

Do you have two properties that could be your main residence?
If you have two properties that could be your main residence (such as a cottage in the country and a flat in town) it is always a good idea to nominate one of them as your main residence within two years of acquiring the second property – this will give you the flexibility to vary the nomination later.

Planning Gain Supplement (the proposed tax on increases in land values as a result of planning permission) was the dog that didn’t bark in this Budget. The consultation document was issued in December 2005 and the deadline for responses passed this February. The consultation talked of implementation in 2008 but there is no mention of it in the Budget Notes or in the 2007 Finance Bill published on 29 March. I wonder when we shall hear more about this new tax.

If you run a business (in a company or as a sole trader) and you are thinking of significant investment in plant and machinery you need to consider whether to spend the money now (50% first year allowances but only 20% writing down allowance on the balance for 2008/09), or wait until 2008/09 (100% first year allowances on the first £50,000 spent).

Are you liable to pay income tax for 2005/06 on a “Pre-owned Asset”? Did you miss the 31 January 2007 deadline for electing for IHT instead? Do you know what I am talking about? If not and if you have the use of any asset you once owned and which you gave away or sold for less than its market value then talk to your tax adviser, because the Budget announced an extension of the time limit for making such an election and it could be beneficial for you to do so.

Did you file your Self-Assessment Return Online?
Have you received a Penalty Notice from HMRC saying you filed your 2005/06 return late? Apparently a number of these have been issued in error. If you did file on time, send HMRC a copy of your IRMark electronic receipt and ask them to cancel the penalty.

Do you have a guilty conscience?
If you have not been declaring some of your income, or have underpaid tax for any other reason, contact HMRC and tell them about it before they catch you – the penalties you pay will be significantly lower if you do this, and in some cases they may be

Do you normally pay your employees on a Friday?
Good Friday this year falls on 6 April 2007, the first day of the new tax year (2007/08). If, because of the Easter Bank Holiday, you do the payroll on Thursday 5 April, then in strict law this payment will fall into the 2006/07 tax year, but by concession HMRC will allow you to operate PAYE on the payment as if it had been paid on 6 April, the first payday of 2007/08.

Tax Efficient Savings
The end of the 2006/07 tax year is approaching fast – if you have a tax-free ISA investment plan, remember that 5/4/07 is the deadline for investing your annual maximum of £7,000

Don’t Touch That Ticket!
If an employee incurs a parking fine in his company car, and the employer pays it, the fine paid will be taxable on the employee, unless:

The car is registered solely in the employer’s name, AND
The parking ticket is stuck on the car rather than being handed directly to the employee

Wedding Bells
If someone you know is getting married, remember the IHT exemption for wedding gifts - £5,000 for each parent, £2,500 for each grandparent, and £1,000 for other relatives or friends.

Be clear about the impact of VAT on growing your business turnover.
Make sure your business plan looks at how you will deal with the impact of registering for VAT. For example, if you provide services to members of the public, registering for VAT may have major implications for your pricing structure.

Consider this!
What a lot of investors fail to realise is that if you transfer ownership of a property to another party (including husband/wife), then stamp duty will be liable if the property is mortgaged and the mortgage amount being transferred is over £125,000. This is called the ‘consideration amount’.

Shame on You!
Have you sent your accountant all the information he needs to prepare your 2005/06 tax return? If not, shame on you! This is the worst month of the year for accountants, as they struggle to complete all their client’s returns in time for the 31 January deadline. I have just spoken to an accountant client of mine, who tells me that less than half his clients have provided him with the information he needs!

Offsetting Your Personal Loan
If you take out a personal loan that is used ‘wholly and exclusively’ for the purpose of the property, then the interest charged on this loan can also be offset.

Setting up A Company
A property management company can be a way to save tax for a buy to let landlord, but do not set up a company that manages your properties and just simply start paying money into it. It is important to get the commercial arrangements and the paperwork correct.

If you’re in doubt – Shout!
The golden rule is – if you’re not sure ask. HMRC would much rather be asked any number of questions than for you to make a mistake because you’re not sure what to do. It is in the interests of both HMRC and the business to get things right from the start, if you’re in doubt – shout!

Have you made losses on the stock market?
If you are one of the thousands of people who have lost money on the stock market, then consider selling your loss-making stocks/shares before you sell a property with a significant capital gain.

Are you using your £3,000 gift allowance?
Gifts totalling up to £3,000 in a tax year are ignored for IHT – and if you did not use the £3,000 in the previous tax year, it can be added to make a total of £6,000 that will never be taxable, even if you die within seven years of making the gift

Is your caravan exempt from CGT?
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Personal Tax Tip - Be very careful!
Be very careful about letting the purchaser start work on the property before completion of the sale – note the rule that your expenditure on improvements must be reflected in the state of the property at the time of completion of the sale, which it won’t be if the purchaser has knocked it down!

Business Tax Tip - Are you having problems?
Are you having problems with distributable profits, dividends, and waivers? There may be another way – ask your Tax Adviser about the tax treatment of loans from the company which are then written off.

Property Tax Tip - Do you have two properties?
If you have made a GWROB, ask a Tax Adviser what you need to do to convert it into a PET – once it has become a PET, it will be free from inheritance tax if you survive for seven years.

Personal Tax Tip - Don’t be ignorant!
Don’t ignore HMRC correspondence, and don’t bin it or feed it to the dog – that’s just asking them to open an Enquiry into your affairs!

Business Tax Tip - Keep records from the day you start!
Start keeping records and invoices before you start trading – most of the expenditure you incur will be an allowable expense once you open for business.

General Tax Tip - The same problems if you are in Scotland!
Trust Law in Scotland is different from that in England, Wales, and Northern Ireland – but the problems created by the 2006 Finance Act also affect Scottish Trusts.

Personal Tax Tip - When buying a shop like Mr Lion’s, the goodwill of the business is “adherent” goodwill – that is, it is treated as part of the value of the property itself, and cannot be transferred separately from the property.

General Tax Tip - Do you have two properties that could be your main residence? If you have two properties that could be your main residence (such as a cottage in the country and a flat in town), it is ALWAYS a good idea to nominate one of them as your main residence within two years of acquiring the second property – this will give you the flexibility to vary the nomination later, as described in the main article.

VAT Tax Tip - The days of cheap CDs and DVDs could well be numbered! There is a concession in the EU 6^th Directive that allows goods valued under £18 to be imported into the UK without any VAT. The idea behind this is to allow personal imports and mail order goods to be brought into the UK without the administrative burden of collecting the VAT from private individuals. The Revenue simply wouldn’t justify the costs of collecting it.

However, a number of large high street traders have worked out that if they supply relatively low value items, mainly CD’s, DVD’s and videos, through subsidiaries in the Channel Islands, they can undercut smaller businesses by selling those goods VAT free. This has been good for the consumer, (and explains why your last order for 4 DVD’s arrived in 4 parcels from Jersey), but bad for small businesses.

Property Tax Tip - Non- business taper relief becomes available after you have owned a property for a full three years. Try to make sure that the property is sold after a full year of ownership has been completed. For example, if you have owned a property for 7 years and 11 months, then try to delay the sale for an additional month so that you are able to claim 8 years of taper relief.

Personal Tax Tip - Do you like to gamble? Winnings on Premium Bonds are exempt from tax, and unlike other forms of gambling, you don’t lose your stake if you don’t win!

Business Tax Tip - Why not get fit, and have a company bicycle instead of a company car? There is an exemption for bicycles and cyclist’s safety equipment, provided more than half of the miles cycled are for business purposes (including travel from home to work), and bicycles are offered to all employees.

Property Tax Tip - If you offer a ‘fully furnished’ property then consider using the ‘10% wear & tear allowance’ if you are going to provide furnishings, which you do not expect to be replaced until several years later. By claiming the allowance you will receive tax relief immediately

VAT Tax Tip - It is worth pointing out that zero-rating only applies to physical printed matter, which is a supply of goods. It does not apply to the same information or document supplied electronically (i.e. e-books), as this is a supply of services, and is standard-rated.

General Tax Tip - There is no inheritance tax on a legacy to your spouse or civil partner, is there? Oh yes there is, if the surviving partner is not “domiciled” in the UK only £55,000 of the legacy is exempt, and lifetime planning will be needed to avoid IHT on the rest.

Business Tax Tip - If you pay for your employees’ business expenses, make sure you have a “dispensation” from your tax inspector. If you don’t, you have to report all the expenses you have paid for on the employees’ P11Ds and the employees then have to make a claim for tax relief.

Personal Tax Tip - Do you have more than one job, or are you an employee with a self-employed sideline? If so, don’t forget you may be able to apply for “deferment” of some of your National Insurance Contributions; better than paying too much and having to wait until the end of the tax year to claim a repayment!

General Tax Tip - Mobile phones provided for employees (and their families) are a tax-free benefit provided the phone and the rental contract are in the employer’s name – good news for family company directors with text-mad teenagers.

Business Tax Tip - Don’t be a Scrooge – office parties are tax free provided all employees who work in the office are invited, and the cost per head is less than £150 per year!

Personal Tax Tip - Made Gift Aid donations since 5 April 2005? Not filed your 2004/05 Tax Return yet? Get your tax relief now, not next year – see Box 15A.4 on the Return.

Property Tax Tip - Don’t forget - If you have made rental losses on your property income in previous tax years then you can carry them forward and offset them against future year profits!

VAT Tax Tip - Christmas tip. It is worth noting that the £50 limit for the cost of the goods supplied as business gifts is VAT exclusive and does not include any administrative costs, including post and packaging. All of these additional costs are on top of the £50.

Dividends for couples - Married couples and civil partnerships who own businesses need to make sure both their tax allowances and lower rate bands for income tax are being used – it’s bad tax planning for one to be paying higher rate tax while the other has income of less than £37,295 for 2005/06.

Make use of the 10% wear and tear allowance - The 10% wear and tear allowance is particularly suited to ‘fully furnished’ property that has been furnished immediately after acquiring it. This is because you can start to make the 10% claim immediately from the first year of letting.

Child Trust Fund Account - If you have a child born after 1 September 2002, up to £1,200 per year can be added to their tax-free Child Trust Fund account – this sum can be made up of gifts from anyone, including the parents.

Fancy a Tax-Free Gift? - Have you been running your company for 20 years or more? Why not reward yourself with a tax-free gift? Section 323 ITEPA 2003 exempts “long service awards” to employees (including directors) with over 20 years’ service. The award must not be in cash, but with an upper limit of £50 per year of service (so 20 years = £1,000), you could buy yourself a really nice gold watch!

Personal Tax Tip - Are you in a syndicate for the National Lottery, the football pools, or something similar? Make sure there is a proper written agreement in place for the treatment of any prizes won – otherwise, the payment to members of their shares can give rise to inheritance tax liabilities!

General Tax Tip - What are you up to?
When the money laundering rules came in in 2003, one of my accountant friends told me he had simply reported all his clients on the first day, on the basis that “everyone’s up to something where tax is concerned”!

Business Tax Tip - Staff entertainment.
One of the “grey areas” of staff entertainment is entertaining people who work for you but are not your employees – for example, I had a long argument with a tax inspector who wanted to disallow the cost of drinks given by a pub landlord to the draymen who delivered his beer, on the grounds that they were not his employees, but the brewery’s.

Personal Tax Tip - Lower rates of SDLT
As you can see from the table, rates of SDLT are lower in “disadvantaged areas”, and there is a facility to look these up on HMRC’s website, using the postcode of the property concerned, but beware – a solicitor told me that this is not 100% accurate, and if it says the relief is not due, it is worth double checking – the “disadvantaged areas” are defined by electoral wards, and sometimes these may have changed.

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