In the first half of a two-part feature, Helen Thornley, a technical officer with the Association of Taxation Technicians, considers how businesses can give their staff rewards in the most efficient manner
Thanks to the freezing of key tax thresholds such as the personal allowance and higher rate threshold, over recent years more employees have been pulled into tax – and tax at higher rates – than ever before. The phenomenon is called ‘fiscal drag.’ In previous decades only the highest earners in those sectors would have been paying higher rate tax. This makes it even more important to find tax-efficient benefits that staff will appreciate.
As a general rule, anything that an employer provides to their employees that has a value – cash, vouchers or benefits – needs to be assessed to tax. Special benefit in kind rules make sure that the provision of perks that staff might appreciate – such as private healthcare or a company car – are all assessed to tax. However, there are a few benefits which can be provided tax-free, provided that employers stick carefully to the qualifying conditions and (in most cases) don’t ask staff to give up salary in exchange for the benefit.
Since April 2017, if an employer offers an employee a choice between either receiving a benefit or extra salary (or asks the employee to give up salary in exchange for a benefit), then special rules mean the employee will be taxed on whichever gives the highest tax bill – the salary given up or the benefit received. Where these ‘optional remuneration arrangements’ apply they cancel out any of the hoped-for tax savings from providing a tax-efficient benefit to an employee.
Exemptions
Pensions: One of the most traditional benefits provided by employers is the workplace pension. In general, employer payments into a pension are tax-free and help employees to provide for their retirement. Only very highly paid employees need to worry about exceeding the annual allowance for pension contributions of £60,000 a year.
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