Tax efficient employment rewards

17 December 2015

We’re often asked by our clients if there are ways to reward their workforces in a tax efficient way, so we’ve put together Ten Top Tips.  In this blog we look at our first five tips, and tomorrow we’ll reveal the next five.

Please bear in mind however that the circumstances of the company and individuals concerned should be established before putting anything you read here into practice. Get in touch with me or your normal UHY contact should you need further advice.

1. Share Schemes

There are tax advantages to rewarding employees through approved share schemes. The most common schemes are:

Free share schemes (Share Incentive Plans) 

Provided shares are notionally held by the employees for five or more years, no income tax or NIC will arise on these shares, although Capital Gains Tax (CGT) will be payable on any eventual gain made on the sale of shares.

Share option schemes

These are popular as the employee’s eventual share allocation can be changed according to length of service and achievements. The Enterprise Management Incentives (EMI) scheme and the Company Share Ownership Plan (CSOP) are the most regularly used by SMEs. No income tax or NIC will arise at the date the options are granted or exercised, unless the exercise price is below the market value of the shares at the date options are granted. CGT will be payable on any gain made by holding the shares post exercise.

Another recent development is that of ‘Employee shareholder status’ which can be offered to employees who do not have a material interest in the company. If the employee enters into this they will need to agree to forego certain employment rights. Shares provided to employee shareholders can be acquired up to a value of £2,000 free of tax and NIC, with tax and NIC falling due for values above this amount.

2. Company Vehicles

There are cars available which are attractive to both the employer and the employee (from a tax efficiency point of view at least!). These ‘green cars’ attract an annual benefit in kind charge of as low as 5% of the car’s list price (or 8% for diesel equivalents) which is almost certainly going to be beneficial for employees who choose to have a company car. In addition, the acquisition of these low emission (currently CO2 emissions of 75g/km or below) cars qualifies for 100% first year capital allowance deduction for the company. Further details on the rates that apply can be found on our 2015/16 tax card.

Dual cab pick ups, such as most of the Mitsubishi L200 range, are taxed as vans if load carrying and usage criteria are met, which often gives employees tax advantages compared with similarly-sized cars.

3. Pension Payments

Employer contributions into an occupational pension scheme are income tax and NIC free benefits for the employee and the company will be able to obtain a deduction for this expense when it comes to computing its corporation tax charge. However, this is subject to contribution limits for individuals.

4. Termination Payments

There is a reasonably well known “exemption” of £30,000 in respect of payments made to employees leaving a business under certain circumstances, however, this is definitely not carte blanche. For example, a payment in lieu of notice (a “PILON”) made to an employee would qualify for the exemption where the employment contract did not expressly give the employer the facility to make such a payment, but if there was a term in the contract allowing the employer to do this then it would taxable employment income. Payments made to employees as part of a redundancy process are covered by this exemption.

The Government has gone through a consultation process in respect of termination payments, the results of which are due to be announced in 2016. Accordingly there are likely to be changes in this area and advice should be taken before using the existing exemption.

5. Mileage Allowances

HMRC have set rates for reimbursement of employees who use their own vehicles for business journeys. These mileage allowances allow employers to reimburse employees tax and NIC free. The allowances apply to cars, bicycles and motorcycles at the following rates:

Rate per mile:
Cars and Vans 45p (First 10,000 miles)

25p (Over 10,000 miles)

Bicycles 20p
Motorcycles 24p

A further tax free payment of 5 pence per mile can also be claimed per passenger per mile, provided the passengers are employees travelling on business journeys. It is also worth noting that the above represents the maximum tax free mileage allowances for employees using their own cars for business. Tax relief can be claimed by an employee on any payments made to them at below those rates. Any amounts received in excess of those rates will be taxable on the employee.

Visit our follow-up blog here for our next five tips, but do remember to get in touch with me or your normal UHY contact before putting any of these measures in place.