As we all know, virtually all rewards - monetary or otherwise, given to employees are subject to statutory deductions for either income tax and/or national insurance contributions. In the case of the latter even if the employee can often avoid some cost the employer cannot.
However, what you may not be aware of is that there are still quite a few areas where both parties can avoid the taxman. Not only that, but in some cases the employer can actually save a bit of money too:
1. PENSIONS AND DEATH BENEFITS
This is one of the hot topics of the moment and one that has seen many changes in recent times. Stakeholder pensions were introduced a couple of years ago but take up by those who the schemes were aimed at has been slower than had been hoped. This may be due to the general feeling that people have about investment returns on pension schemes over the last few years.
A lot of negative sentiment has been generated from the much-publicised move of many organisations away from guaranteed “final salary” pension schemes to “money purchase” schemes. However, despite all of these changes, pensions are still a very tax efficient way of saving.
Contributions made by the individual employee are still deducted from gross pay and are, therefore, effectively tax-free. This means that an employee who contributes £1 into their pension fund, pays that £1 before deduction of tax, thereby saving 22p or 40p depending upon their marginal rate of income tax. Often linked into company pension schemes is life cover. Life assurance payments up to four times annual salary will normally be tax free as long as the ultimate selection of the beneficiary to whom a payment is made remains at the discretion of the trustees of the scheme.
2. STAFF SUGGESTION SCHEMES
These have been around for many years in various guises but the simple fact remains schemes can be set up so awards made for money saving suggestions can be paid free of tax. There are a series of rules to follow:
• The Suggestion Scheme must be clearly defined - suggestions offered at a general meeting are not allowed.
• It must be open on equal terms to all staff (either across the organisation or within a particular group or department).
• Suggestions must relate to the employer’s normal business activity.
• Suggestions must be deemed beyond the normal contribution expected of the employee, taking their experience in the job into account.
• Awards must be made only following a decision to actually implement the suggestion.
• Maximum awards payable are 50 per cent of the estimated first year net saving or 10 per cent of the estimated five-year net saving.
• The maximum tax-free element of any award is £5,000.
• Where an award for an accepted suggestion is shared between two or more employees the total award paid is subject to the above limits.
• An encouragement award (maximum £25) is allowed where there is intrinsic merit and/or meritorious effort even if the suggestion is not implemented or no saving is identified.
3. SALARY SACRIFICE FOR HOME COMPUTING
This is a scheme whereby an employee can effectively purchase a computer for use in their home at reduced cost, with a small saving for the company too.
In essence the way the scheme works is that the computer is initially owned by either the employing company or, in some cases, by the scheme provider. It is then leased to the employee for a fixed monthly payment. That payment is made free of income tax or national insurance. There is a final nominal payment at the end of the lease period to purchase the computer from the initial owner.
The benefit to the employee is that they pay for the computer over an agreed time period in equal monthly amounts with the money taken from gross pay, so saving tax and NI.
As an example, if the computer and accessories cost a total of £960 including administration and interest charges, leased over two years, then the monthly payment will be approximately £40 from gross pay. For an employee paying 22 per cent tax and 11 per cent NI, the saving will be approximately £13 per month, or over £300 in total. There will also be a saving to the company of the employer's NI contribution.
There are a few issues to consider including the effect on cash flow/debt if the company owns or underwrites the value of the computers and a possible effect on pensions if these are based on gross pay, although the latter can normally be accommodated. (Incidentally, this scheme does not apply to employees on the statutory minimum wage.)
4. CYCLES
A similar scheme exists for employees to purchase a bicycle. The method of operation is usually the same as that for computers. (As the intention is to encourage cycling to work it is logically not possible to include children’s cycles in this scheme.)
5. CHILD CARE
Subject to certain rules and limits, nursery provision run by an employer or group of employers can be offered tax-free. In addition the purchase of childcare vouchers by employees can be facilitated tax and NI free.
Again there is a small saving to the employer through reduced NI. The method to achieve this is by using salary sacrifice, so payments are made out of gross pay and are therefore free of income tax. This scheme does not have the cash flow issues surrounding the lease or purchase of computing equipment or cycles as no loan is involved - simply a deduction from pay which is used to pay for the vouchers. There are a number of organisations that offer vouchers.
6. LONG SERVICE AWARDS
Companies are allowed to make a gift of a “tangible article” up to the value of £50 a year of service - subject to a minimum of 20 years’ service. This cannot be cash and is also subject to no similar award having been made in the previous 10 years. This will not attract income tax.
7. CHRISTMAS PARTIES
An annual function such as a Christmas party may be provided without liability to tax up to a maximum cost of £150 a head as long as the offer is open to all staff generally.
8. SPORTS FACILITIES
Sports facilities may be provided to employees and their immediate families as long as the facility:
• is not available to the general public,
• is not provided domestically,
• does not involve overnight accommodation and
• does not involve cars, boats or planes.
9. MOBILE TELEPHONES
An employee may be provided with a mobile telephone including rental and calls. Cash reimbursement for rental of a mobile telephone may, however, be taxable.
10. FREE OR SUBSIDISED MEALS
This remains free of tax as long as all employees are equally entitled. The definition of equal entitlement includes the making of a provision for staff that cannot access the canteen facility.
EMPLOYMENT TRIBUNALS UPDATE
Regular readers will be aware that we highlighted back in August the changes that were scheduled to come into effect on October 1, relating to the Employment tribunal process. In summary the following changes are now live:
1. New forms are being prepared and should be available, extending the information that each party must disclose and these must be used by April 2005. Make sure that you comply with this, as responses on the old forms will not be accepted after April.
2. From now on all applicants will be known as “claimants”.
3. Employers must respond to a claim within 28 days (currently 21) or persuade the tribunal to offer an extension of time. This will be considered only on the grounds of whether such a claim is “just and equitable”. Time limits for response and other orders of the tribunal will be more strictly enforced. Failure to meet deadlines could result in the defence case being struck out.
4. There will be a fixed period of time allotted for conciliation. This will be seven to 13 weeks depending upon the nature of the case.
5. Some claims will not be progressed where there is an internal “statutory” grievance process that has not already been followed. Where appropriate, the parties may be ordered to follow through the procedure before being able to return to the tribunal.
6. The old system of “preliminary hearings” is to be replaced by a “pre-hearing review”. This will consider whether the claimant has the right to bring a claim in the first place. Case directions or orders (now all to be described as “orders”) will still be addressed at this time.
7. The ability of the tribunal to award costs is extended. Represented parties may claim up to £10,000 (or more, via a separate process) whilst unrepresented parties may claim costs of ‘preparation time’ in certain cases.
8. Costs may be awarded against representatives if, in the opinion of the tribunal, they have behaved in an unacceptable manner.
9. If the claimant withdraws his or her case this will not automatically lead to dismissal of the case so a separate application for dismissal should be made.
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