The Chancellor has already announced that income tax will increase to 50% for the higher earners in April 2010, but it isn’t just those who earn more than £150,000 a year who can benefit substantially from the range of tax and NIC efficient benefits available.
The changes to the income tax rates and allowances are due to take effect from 6 April 2010, followed by in-creases to National Insurance contributions (NIC) for the employee and the employer from 6 April 2011. Whilst the current Government may no longer be in power by 2011, the Conservatives have so far not committed to returning the rate to 40%, should they be elected. Higher rates of taxation seem inevitable for individuals and employers alike.
What are the proposed changes?
- From 6 April 2010 - Income tax for individuals with total taxable income in excess of £150,000 will have a marginal rate of 50%.
- From 6 April 2010 - Personal allowances for individuals with total taxable income in excess of £100,000 will be reduced by £1 for each £2 over the £100,000 limit. This means that for those with income in excess of £113,000, no tax free personal allowance will be available.
- From 6 April 2011 – National Insurance rates for employers and employees will increase by 0.5%.
It’s not just the higher paid who should be concerned
Whilst the higher earners capture the headlines in terms of the tax increases, those on lower or even the average wage are affected too. There are a number of Government initiatives which support those on lower incomes. Many of the allowances or credits available are based on a level of taxable earnings. These include: working tax credits, the educational maintenance allowance and student loans.
Because of the way the qualification for these benefits is structured, a small pay rise or cash bonus can push the employee over a threshold and result in the employee being worse off overall.
Perhaps the answer is for the employer to provide more of the reward package by way of valuable benefits to the employee, whilst keeping the cash salary below the allowance thresholds.
Salary sacrifice and flexible benefits
Do not be concerned about the increased costs of introducing new benefits. The employer can offer the em-ployee the choice of benefits which they really would value as part of a salary sacrifice arrangement. In other words, the employee swaps part of their salary which would have been subject to income tax and NIC in exchange for a tax and NIC free benefit. The employer, whilst required to source and arrange the benefit, is able to save the employers NIC too.
There is a myriad of benefits which can be provided as tax or NIC free and employers should reconsider whether it will be beneficial to offer a wider range to employees.
The other advantages of tax efficient benefits
There are other advantages in providing many of the tax efficient benefits, in addition to the tax and NI savings for the employee.
For the employee, these are:
- The employer can source the benefits at a lower cost by securing significant discounts for ‘bulk pur-chases’; and
- Improved terms not always available to an individual (for instance, private medical insurance which covers existing conditions or lower claims excesses).
For the employer:
- A valuable addition to the employer’s reward strategy and a positive step towards being an employer of choice;
- Employer NIC savings; and
- Welfare and medical benefits which help maintain a healthy and productive workforce.
The most popular tax effective benefits
Most employers will offer at least one or two of the most popular benefits such as pension or childcare vouchers, with others providing a more comprehensive range of benefits as part of a more formal flexible benefits arrangement. The technology available to track the benefits choices for each employee is considerably more advanced than a few years ago. Many offer the facility of on-line selection via the employer’s intranet site, which can prove to be both efficient and cost effective.
So, are you making the most of what’s on offer?
Here is a flavour of what you can do:
- Pension contributions – Contributions made by an employee to an approved pension plan receive income tax relief and any contributions made directly by the employer are not subject to either income tax or NIC. For the employee contributions, the pension can be deducted from the employee’s gross (pre-tax) salary so that the income tax relief is given at source. The employee contribution is, however, subject to both employers and employees NIC, so many employers are now offering employees the opportunity to sacrifice part of their salary in exchange for increased employer pension contributions in order to save on these NIC liabilities. Of course there are proposed changes to the tax relief available for pension contributions from April 2010, but this will only affect those with income in excess of £150,000.
- HM Revenue & Customs (HMRC) approved share plans – These plans enable employees to acquire shares in their employer company, either now or in the future (by way of an option). Increases in the value of the shares can be exempt from income tax and NIC.
Whilst investment in company shares may not seem attractive following the fall in values over the past 18 months, but a share or option award now, whilst the share values are suppressed, may prove that now is the best time to act. At Vantis we have been able to secure very favourable agreements with HMRC for low values of private company shares for approved share plans.
By far the most popular and generous HMRC approved share plan is the Enterprise Management In-centive share option plan. As the name suggests, it is an option scheme which grants the employee a right to acquire shares in the future, either from a specified date or upon a specified event (such as a sale of the company). Provided that the option is granted with a share price of at least the current market value, as agreed with HMRC, any increase in value of the shares is subject only to Capital Gains Tax (CGT).
- Childcare – Employers are able to provide employees with assistance for childcare without income tax or NIC liabilities. This can be provided directly to contracted childcare (such as approved childminders or nurseries) or workplace nurseries. Alternatively, it is provided indirectly via childcare vouchers. The contracted childcare or vouchers are income tax and NI free up to £55 per week per employee. The vouchers can be purchased from third party providers and are available in paper or electronic formats.
Whilst those with pre-school children will benefit the most from this arrangement, vouchers can be used against the cost of early morning or after school care and holiday clubs for all children up to 1 September following the child’s 15th birthday.
- Mobile phone – The provision of one mobile phone to an employee is not a taxable benefit. This exemption applies to the cost of the phone, the line rental and calls from that phone. Where the private use of the phone is more than insignificant the phone can be subject to income tax and NIC as a benefit in kind. This will be based on the cost of the handset, monthly tariff and the cost of the private calls. The cost of an additional phone provided to the employee is taxable. Whilst PDAs are not strictly considered to be a mobile phone for these purposes, HMRC has confirmed that where PDAs are provided solely for business use or the private use is insignificant, the exemption applicable to mobile phones will also apply to PDAs. An employer cannot provide a traditional mobile phone plus a PDA tax-free; only one will be exempt.
- Low emission company cars – Cars with no more than 120g/ CO2 have a flat rate benefit charge of 10% of the list price of the car, plus accessories. This is considerably lower than the rates for those cars with higher levels of emissions or for diesel cars, which will generally range from 15% to 35% of the list price plus accessories.
- Vans - Provision of a van for work purposes is generally not taxable either where the van is used on a pool basis or where the non business element of the mileage is restricted to a commute only. This is a valuable benefit for most van drivers, but the private mileage should be monitored by the employer. Any more than the daily commute would render the employee at risk of the standard van charge of £3,000 per annum (plus a further £500 if private fuel is provided). Employers should advise their employees in writing that additional private use is prohibited and retain a copy as evidence for HMRC if challenged.
- Bicycle for commuting – Where an employer provides a bicycle for an employee, there is no taxable benefit where the bicycle is used mainly for ‘qualifying journeys’. The cost of safety equipment is also exempt from a taxable benefit charge. A number of bicycle suppliers offer a corporate account to make it easier for the employee to obtain the bicycle of their choice through the corporate scheme. The interpretation of ‘qualifying journeys’ is the same as for employer provided buses (see below).
- Bus Travel – Where a bus is provided by the employer which is mainly used to take employees on qualifying journeys, the cost of providing the bus and driver is exempt from tax and NIC. The definition of ‘qualifying journeys’ being: a) between the employee’s home and normal work place; b) between workplaces; or c) between the workplace and local amenities such as shops or sports centre. This is particularly useful for organisations based at out of town business parks and which provide a bus service between say, the local town centre or train station to the business park. Exemptions apply where more than one employer contributes towards the cost of a shared private bus facility. Less common is where an employer might subsidise a public bus service, for instance to secure a bus route or bus stop at or near to the place of work. These costs are also exempt.
- Training – expenses for work-related training are exempt, regardless of whether the training was paid directly by the employer or the employer reimburses an employee expense. The exemption also covers the cost of course material, travel and subsistence costs related to the training provision. Non work related training is taxable and also subject to NIC.
Training is defined as any activity designed to impart new skills, or reinforce existing skills, which the employee will use as part of their duties of employment.
- Health Screening – Most types of medical check-ups, health screening and eye tests are exempt from income tax and NI. A previous HMRC practise was formalised in 2008 which required that, in order for medical check-ups or health screening to be eligible for tax and NI exemption, the facility is required to be generally available to all employees, or for employees who have previously been screened and identified as requiring a regular check-up. It is possible for differing levels of screening to be provided, just as long as all employees are eligible for something. Only one check-up per year is exempt.
- Staff canteen and refreshments – where meals or refreshments are provided for free or on a subsidised basis at the work place to all staff, an exemption applies. It is important that the facilities are available to all staff. So for instance, sandwiches provided for a working lunch to a select number of employees attending a specific meeting will not be covered by the exemption and is likely to be subject to income tax and NIC, although most employers would pay the tax on the employees’ behalves under a PAYE settlement agreement. Those employers operating in the hospitality sector whose business is to supply food and drink to customers have an additional condition to meet, which is that the food must be provided at a time when they are not open to the public or else it is consumed in an area not open to the public.
- Car parking at or near to a place of work – Provision of parking for a car or motorbike by the employer or the reimbursement of an employee’s expense at or near to the employee’s place of work is exempt from income tax and NIC. The parking does not need to be on the employer’s premises and can include parking at the local public car park or other facility, provided that it is near to the place of work.
- Loans to employees – Interest free or cheap loans up to a value of £5,000 provided by an employer are exempt from income tax and NIC. This exemption is often used to provide season ticket loans to employees. Further exemptions are also available for loans in excess of £5,000 where the funds are used for qualifying purposes, such as the subscription of qualifying shares. Interest free loans which exceed £5,000 are subject to income tax and employers NI based on HMRC’s official rate of interest (currently 4.75% per annum).
Other tax effective benefits include: Relocation expenses, long service awards, and subsistence allowances.
Are you making the most of what is on offer?
Contact Kiki Stannard, Head of Reward Consulting, for further details. Alternatively, please complete and submit the online form below.