Remuneration packages can be fantastic for both employer and employee, being flexible and potentially tax efficient for both parties.
Although factors such as minimum wage and paid holiday must at least equal the statutory minimum, many aspects of remuneration are at the discretion of employers. There are then a number of opportunities to structure packages to take advantage of the various tax and National Insurance exemptions and reliefs available.
1. Salary Sacrifice Arrangements
These allow employers to offer employees the opportunity to sacrifice a certain amount of their cash salary in return for a non-cash benefit.
It is possible in these circumstances for the employee to save tax and Class 1 National Insurance Contributions, and for the employer to also save on National Insurance. In particular, this option can be very effectively used in order to enable employees to benefit from the tax exemption for Childcare vouchers.
2. Flexible Benefits Scheme
It’s often said that happy employees are productive employees, and a flexible benefits scheme could certainly be an effective way to keep the office cheery. Simply put, employees can decide for themselves whether they would prefer part of their salary in cash or benefits-in-kind, such as extra paid holiday or private healthcare.
There are certain elements which are obviously fixed; minimum levels of cash salary, paid holiday and pension provision must for, instance, be maintained. Nevertheless, beyond these, employees can tailor remuneration to their individual needs.
As above, it is entirely possible in these circumstance for both employee and employer to make National Insurance and tax savings, depending on which benefits an employee selects.
3. Saving Employees’ National Insurance Contributions
Even where a benefit is not exempt from tax and National Insurance, it can still be beneficial for employees to choose a benefit-in-kind, as this will save employee Class 1 National Insurance Contributions. Many benefits are only liable to Class 1A, which is only payable by the employer.
4. Tax Free Benefits to Employees Earning Under £8,500.
The vast majority of non-cash benefits are only taxable when provided to employees earning at a rate of over £8,500 a year, therefore employees earning less than this are eligible for tax-free benefits. This can be especially useful for situations, where an employee perhaps only works one day a week.
5. Beware the £8,500 Trap
An employee whose actual cash salary is less than £8,500 in a tax year can still be regarded as earning at a higher rate for the purposes of benefits-in-kind allowances. This is due to the cash value of these benefits being taken into consideration when determining whether the £8,500 threshold has been reached.
In addition, where an employee only works for part of the year, their annualised earnings are used to determine their yearly wage, rather than actual earnings for the period of employment.