Tax and national insurance rates may be rising and HMRC may be cracking down on avoidance schemes but there are legitimate ways to achieve tax efficiencies.
1. Pay bonuses early
Many companies are considering bringing forward the payment of bonuses which would have fallen to be paid after 6 April 2010 and therefore havqe attracted the higher income tax rates. This is attractive as it is simple. Shareholders will be concerned that performance periods being rewarded have been completed rather that bonuses being paid partly on guess work. It is also appropriate to ensure that any overpayment based upon unaudited results can be clawed back once audited figures are available.
2. Salary sacrifice into pensions and other tax efficient benefits
For those earning £100,000 and over it makes good sense to consider salary and bionus sacrifice arrangements. The employee simply gives up the right to part of his or her cash remuneration under his or her contract of employment in return for the employer's agreement to provide the employee with some form of tax efficient non-cash benefit.
“Salary sacrifices” can be made into many forms of tax efficient benefit, for example, child care vouchers which are popular with employees with young families or pensions, which is examined further below.
Advantages to employer
If the salary sacrifice is made in return for the employee receiving a benefit which does not attract national insurance contributions (“NICs”) liability the employer contributions will be saved. These currently amount to 12.8% (assuming there is no discount for contracting out of the second state pension). This rate is due to rise with effect from 6 April 2011 to 13.3%.
The saved contributions can be applied to defray the costs of setting up the arrangement, to increase the benefit provision to the employee, or to reduce the employment overhead for the employer. Quite what scope there is depends upon the aggregate amount of salary sacrificed under the arrangement which will dictate the amount of employer’s NIC savings.
Advantages to employee
The employee is able to save the amount of employee’s national insurance contributions and apply the value of these to their chosen benefit. Some employers also pass on some of their savings to benefit the employee.
By reducing the employee’s gross wages this can affect mortgage applications and entitlement to state benefits. The employer should advise the employees of these consequences. Further information of the effect in relation to state benefits is available at on HMRC website (see Resources below).
For employees on maternity leave sacrifice of cash remuneration into benefits can mean that the employer retains an obligation to fund the benefit whereas there would be no obligation to pay salary during the period.
Salary Sacrifice into a Registered Pension Scheme
The amount of salary sacrificed can be paid by the employer into a registered pension scheme operated by it for its employees or into the employee’s personal scheme. (Please note that anti-avoidance provisions will apply for the tax year 2009/10 and onwards for those earning £150,000 and over seeking to make salary sacrifice into pensions – see Resources: “UK income tax and social security - the new realities”).
Table 1. Comparison of net benefit delivered by salary against salary sacrificed to pension provision (applying 2009/10 tax and NIC rates –net benefits of sacrifice will increase with new income tax rates in 2010/11 and higher NICs in 2011)
Net salary sacrifice
Gross amount (pre-income tax and employee’s NIC) to apply to pension contribution
Employer’s National Insurance Contributions calculation–saving @ 12.8%
Total possible sum available to apply to pension contribution (including employee’s NIC saving)
Employer’s pension contributions to registered personal scheme
All numbers rounded
3. Tax efficient employee share plans – is there a better time?
Some employee share plans are able to ensure that all or part of the value delivered under them is taxed as capital gain at 18% rather than being subject to income tax at 40% for higher rate tax payers (and rising in April 2010 for those earning over £100,000 per annum). Some can deliver national insurance and corporation tax savings for the employer.
Tax efficient share plans include those which are approved by HM Revenue & Customs (EMI Options and Company Share Options) as well as plans which, while not being specifically approved by HMRC, still carry significant tax benefits if implemented appropriately.
No cash cost
Significantly, delivery of reward in the form of a share based plan does not bear a cash cost for the company while many plans will carry a corporation tax deduction.
Salary sacrifice into share plans
Many companies are allowing employees to sacrifice entitlement to their salary or bonus in return for a grant of a nil cost option over share with a commensurate value. The employee thereby defers an income tax and national insurance charge until the time when he or she exercises the option. Employees earning over £100,000 per annum will hope that by the time they come to exercise their option income taxes will have reverted to more benign levels. By utilising HMRC approved share plans whether or not a lesser tax charge is achieved by deferral the rise in value of the shares may be taken as capital gain and taxed at 18% (current rate).
The employer stands to benefit by reducing demand on its cash flow and by having a potential influx of subscription monies on exercise of the options.
For those who consider that their share prices can only rise as the UK and the wider world moves towards better economic times such arrangements can be attractive.
We are happy to meet to discuss how any of these ideas can benefit your company or, simply to send you more information.
Details of various types of plan are given on our website as follows:
HMRC Approved Share Plans (EMI Options and CSOP)
Tax advantaged all employee share plans
Other tax effective share plans
Article: “UK income tax and social security - the new realities”
Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue, please seek specific advice relevant to your particular circumstances.