With the ever increasing burden of tax and national insurance could you let me have any ideas on tax efficient alternatives to giving employees wage increases?

Ben Chaplin, Managing Director of Peninsula TaxWise responds:

With the new tax year upon us, many employers are looking at tax efficient ways to reward staff without increasing the tax/NIC burden on either themselves or their employees and avoiding sacrifices in other parts of the business.

Not all sacrifices need to be painful and with some help from HM Revenue & Customs (HMRC), along with careful planning, Salary Sacrifice schemes can reap significant benefits, especially with the looming increases in tax rates and the freezing of personal tax allowances and thresholds from April 2010.

Schemes can benefit not only Directors but also employees by reducing total salary costs whilst increasing the value of the employment package.

There is a selection of tax free benefits that can be given as a substitute to salary including;

  • childcare vouchers up to £55 per week,
  • daily meal allowance including the cost of a meal or meals while travelling,
  • parking at or near work, and
  • payment for relevant training courses.Particular benefits will need to be matched to your or your individual employee’s needs to ensure a tax benefit arises and they can take advantage of the tax free status. With childcare vouchers for instance they are only tax free where the child the employee is responsible for is aged under 16 and the voucher is redeemed for registered or approved childcare. For lower paid workers care should be taken that the salary sacrifice has no adverse effect on tax credits where vouchers are provided by the employer.

    A daily tax free subsistence allowance of £10 for two meals could be worth over £2,300 per year for employees who are on the road for 230 working days per year. Assuming that the employee paid combined tax/national insurance of 31% and had to find £10 per day from taxed income they would need additional gross pay of £14.50.

    Replacing £2300 of the annual gross pay of an employee subject to basic rate tax with a tax free meal allowance of the same amount will lead to a net pay increase of £713. In addition to this employee benefit the employer will save national insurance contributions amounting to £295 giving a total saving of £1,008.

    The daily subsistence allowance can only be paid to employees who are away from their home or office for at least five hours to claim the one meal rate or 10 hours to claim the two meal rate. In addition the employee must have purchased at least one meal. These subsistence rates are set by HMRC and need to be included in your P11D dispensation agreement with your tax office before you can pay them tax free to your employees.

    As with all such opportunities salary sacrifice schemes need to be properly planned and introduced correctly. The salary substitution must be agreed in advance of the employee becoming entitled to the pay. For example gross pay due from 1 April 2010 could be reduced in March 2010 in return for a subsistence allowance but a bonus accrued for the period to 31 December 2009 cannot be substituted for professional course fees payable in April 2010 as the entitlement to the bonus had already arisen.

    Most importantly you will need to amend your employee’s written employment conditions to include the revised level of gross pay. This again must be done in advance of any payment under the new arrangements. If you are unsure how to amend the conditions always seek professional advice to ensure you do not breach employment law requirements. HMRC will not accept that a Salary Sacrifice has taken place with documentary evidence of the amendments to the employee’s terms and conditions.

    For lower paid staff it is essential that you ensure you do not reduce gross pay below the National Minimum Wage requirements, currently £5.80 for adult workers. Even where the difference is made up with a tax free meal allowance you cannot reduce the rate of pay below the statutory minimum as the meal allowance is not counted as part of the national minimum wage rate.

    If you have any additional queries about Salary Sacrifice schemes, call the Peninsula TaxWise Advice Service on 01455 852555 and speak to one of our specialists to see how much money they could save your business.