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February 26th 2019

Tax efficient rewards for employees: our top five

Want to reward staff for their good work and save money at the same time? Consider these five tax-efficient ways to reward employees.

1 Salary sacrifice

Salary sacrifice schemes can be a cost- effective way to help employees. Employees give up pay and receive a benefit instead. Often these benefits may have more favourable tax treatment, or may even be completely exempt from tax and national insurance (NI) if certain criteria are met.

Salary sacrifice has been around for some time. Common schemes cover:

  • Buying extra annual leave
  • Childcare vouchers
  • Cycle to work
  • Pension payments
  • Training (such as an MBA)

2 Share schemes

Employee share schemes can reward and provide long-term tax efficient incentives. They can be used to recruit, retain and motivate employees as well as improve staff performance and morale.

There are a number of schemes that allow anything from a small group of key individuals through to the entire workforce to be offered direct shares or share options/incentives in a tax efficient manner. These include one of the most popular employee share schemes, the Enterprise Management Incentive (EMI).

Specifically targeted at small trading companies, EMI options are discretionary so they do not have to be offered to all employees. There are specific statutory conditions that the EMI company and the employee must meet.

3 Loans

From 6 April 2014, the interest free beneficial loan limit went up to £10,000 with no tax implications. Such loans are commonly used for commuter season tickets, but loans can be used for other employee incentives.

Employers might want to reconsider any current policy or provide additional assistance, by using the limit where funds are used to help employees with raising a home deposit, getting a car or reducing their student loan.

4 Recreational benefits

This is a well-known exemption for annual parties and functions. Employers can provide functions to a total cost of £150 per head (with certain criteria) without creating a tax liability. This exemption could generate a lot of goodwill from staff if you use it to hold an annual function.

Gifts to staff to thank them for their work can also work – although note that many gifts need to meet certain criteria otherwise HMRC will dub them ’non trivial’ and disallow the tax exemption.

Taking this further, employers can provide sporting or other recreation facilities tax-free provided certain conditions are met. This might cover a facility such as a workplace gym, provided that the facilities were not made available to members of the public.

5 Staff suggestion scheme

Something that many employers forget about is a suggestion scheme, which can lead to your team delivering tangible savings for your business. Under a suggestion scheme employers can pay up to £25, tax-free, for any employee suggestions for improving the way the business is run.

Where employee ideas deliver a financial benefit for the company they can pay the employee 50% of the financial benefit achieved in the first year following adoption, or 10% of the financial benefit from the first five years, subject to a maximum of £5000.

In order to implement a suggestion scheme HMRC’s approval is needed.

A creative approach to rewards can keep your people happy - however it should be remembered that a benefit is only a benefit if the employee actually wants it!

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