In these challenging economic times it’s often difficult for businesses to find the cash for extra rewards to staff. Pay rises are often unaffordable and employers run a very real risk of losing those key staff who are vital to growing the business in the future.

With sensible planning, however, employers can improve the value of their employees pay packets in a low-cost and tax efficient manner through salary sacrifice arrangements, and small to medium sized companies can use simple share schemes to deliver lower-tax rewards which not only incentivise those key employees but ensure their loyalty by deferring those rewards by up to 5 years.

At WMT we can help you in deciding what is the most appropriate and effective way of planning remuneration for employees.

Salary Sacrifice

Through salary sacrifice employees can pay for certain benefits tax free which currently attract either Income Tax, National Insurance, or both. Employees agree to give up a proportion of salary, usually for a minimum of 12 months, and in return their employer uses the money to provide a benefit to the employee in return. Typical benefits provided include:

• Contributions to a pension scheme
• Mobile telephones, including iPhones
• Free car parking at or near the place of work
• Bicycles for use in commuting to work
• Purchasing additional annual leave

For employees the cost of paying for these benefits has now reduced, typically by 32%, as the cost is paid from gross pay instead of from net. For the employer National Insurance is also saved, meaning that salary sacrifice not only delivers more value to staff but saves money for an employer too.

By using salary sacrifice to pay for pension contributions an employee can increase the value of their contribution by over 13% at no cost to either themselves or their employer.

Larger businesses may also be able to provide staff with taxable benefits through a salary sacrifice, as the savings which can be negotiated by buying in bulk will often outweigh any residual tax charge.

Share Plans and Arrangements

HM Revenue & Customs approve a range of different schemes which deliver tax-efficient rewards to employees. The size and structure of your business will dictate which scheme is right for you, but most schemes require a wait of between 3 and 5 years to gain the best tax treatment, which can help a business in retaining those key employees often responsible for delivering success and growth. For unquoted companies a valuation will usually be necessary which is agreed with HMRC.

The most widely used Scheme is the Enterprise Management Initiative, which offers the follow key features:

• Total flexibility to select which employees can enter the scheme – options do not need to be offered to all employees
• Shares with a market value of up to £120,000 at the date of grant can be issued to each employee.   The maximum overall value of the shares over which options can be granted is £3 million
• The employee cannot own or control more than 30% of the shareholding of the company (including the shares within the option)
• Enjoys the benefits of approval from HM Revenue & Customs with gains on share value between grant and exercise subject to capital gains tax and not income tax
• Options can be issued at less than market value, however it is important to bear in mind that PAYE and NICs will be due if the employee does not pay market price for shares
• The EMI scheme allows the company to set restrictions over the shares e.g. the shares may be non-voting.
• There is no minimum period for how long the options must be held before exercise.  The employer has total flexibility, however the options must be capable of exercise within 10 years and if not exercised at that point they must lapse.
• The company must not be a subsidiary company and must be carrying on a qualifying trade within the UK.

Not all businesses will qualify for an EMI scheme, but we can advise on alternative options for those who do not which carry similar benefits.

WMT Chartered Accountants are able to advise you on the various plans available, the tax advantages, and which scheme is most appropriate to meet your wishes. These schemes are the most tax-efficient mechanism of delivering medium and long term rewards to employees, giving them a real feel of a stake in the future growth and success of your business.

These notes are intended for general guidance only and are not intended to be comprehensive. For specific advice concerning your situation or for further details please contact Peter Davies (salary sacrifice arrangements) or Anil Arora (share schemes) on 01727 838255.