special reports How to Reward Staff in a Tax

special reports How to Reward Staff in a Tax-free Way 2008/9 additional HolidaY How do the savings stack up from giving extra holiday? Why not offer your employees the option of taking extra paid leave as part of your flexible benefits scheme? An employee can effectively “buy” more holiday days. By doing this, the company saves one day’s gross pay plus 12.8%, and the employee has an extra day’s holiday which effectively costs them only 69% (if a basic rate taxpayer) or 59% (if higher rate taxpayer) of their gross daily pay rate. How do we calculate the cost of a day’s holiday? The cost of a day’s holiday depends on the employee’s salary and the number of days a week they work. If an employee works a five-day week, then they have 261 working days a year (365 less 52 x 2). The employee’s salary (after any pay rise) is divided by the number of days to work out their daily pay. Example Adam’s current salary is £20,000 and you have decided to give him a £1,000 pay rise this year which he can either take as cash or select from a list of benefits which includes additional holiday. Adam works five days a week and has an annual holiday entitlement of 25 days. The cost of a day’s holiday is £80.46 (£21,000 / 261 days). If Adam decides to take an extra five days’ holiday, then the company will save £402.30 in gross pay plus £51.49 employers’ NI. This leads to an overall saving of £453.79. If you have to pay for a replacement when an employee takes leave, then price additional days at a premium, e.g. 20%, to cover the additional cost. are there any disadvantages? The only real disadvantage is that you lose the productivity of an employee for a day. To minimise this, specify a maximum amount of additional holiday that can be taken, e.g. five days, to avoid key employees from being absent for too long. And you still have to give your employees their minimum holiday entitlement which is 4.8 weeks (that’s 24 days’ paid holiday if your employee works five days a week). This entitlement will increase to 5.6 weeks from April 1 2009. KeY points • for each extra day, the company saves the employee’s gross pay plus 12.8% • the extra day only costs the employee 69% or 59% of their gross daily pay • beware of productivity issues. 10 special reports How to Reward Staff in a Tax-free Way 2008/9 HoMe CoMpUteRs is offering computers still a viable option? Before April 6 2006 your company could lend employees a computer to use at home plus equipment/ software that worked with it, such as a camera or printer, with no tax or NI cost to either of you, as long as the total value of the equipment was less than £2,500. The Chancellor thought this generous tax break was being abused so the loophole was plugged. Now, if the company provides an employee with a computer to use privately, the employee must pay tax on 20% of the value of the equipment, and the employer must pay NI at 12.8% on this taxable benefit figure. For equipment worth £2,000 this would mean an annual tax charge of £160 (£2,000 x 20% x 40% as a higher rate taxpayer) for the employee and £51.20 in NI (£2,000 x 20% x 12.8%) for the company. Home Computers: summary of tHe tax and national insuranCe impliCations Deductible for the company? Employers’ NI? Employees’ NI? Employee Tax? P11D entry? Included as income for tax credits? Yes (whatever the value) No significant private use, no. Otherwise yes on 20% of its value p.a. No No significant private use, no. Otherwise, taxed on 20% of its value p.a. No significant private use, then nothing needs to be shown on the P11D. Otherwise the benefit-in-kind value, of 20% of the cost to the company of providing it, needs to be shown on the P11D No significant private use means no benefit-in-kind which in turn means no effect on income for tax credit purposes. Otherwise, include as income for tax credit purposes There will be no charge on anyone who entered into an arrangement for employer provided computer equipment before April 6 2006. This extends to having faulty equipment replaced under a maintenance contract, however an upgrade would bring them within the new regime. does there need to be 100% business use? The Taxman says that he will not tax anyone whose personal use is “not significant”. Essentially, if the employer’s motive for providing the computer is solely to help the employee in their work, it doesn’t really matter how much time they or their family use the machine for other purposes. If the employee has another PC at home which they use for private computing, this leaves the company one for business use. eMploYeR tip Issue a company policy/memo (to the employee) stating that any new computer equipment provided after April 6 2006 is strictly for business use; private use is henceforth banned. is there a limit to the equipment you can provide? Under the Taxman’s new rules there is no limit on the value of the computer equipment that can be 11 special reports How to Reward Staff in a Tax-free Way 2008/9 provided to employees, as long as the company’s sole intention is to provide it for a genuine workrelated function. Example Say part of the employee’s job description is to analyse stock market prices as they change around the world. They may need a flat screen digital TV to allow them to take in this information while they grab some breakfast. As long as the company provides the equipment solely for them to undertake this part of their job, there is no benefit-in-kind tax charge. Rule of thumb. As long as their job description requires a computer and there is a written company policy in place over private use of such equipment, the use of the machine and related equipment is tax-free. What about computer-related equipment? Anything designed to be used, connected to or inserted into a computer will also be liable for tax, including printers, scanners, modems and even MP3 players. According to the Taxman, BlackBerrys and other personal digital assistants (PDAs) had been exempt from tax because they were used mainly as mobile telephones, but their increasing sophistication has brought them into his orbit. They have additional functions more typically associated with a computer. So anyone who sends too much personal e-mail on a work BlackBerry could face a bill of hundreds of pounds under the new rules governing work benefits. The Taxman has issued revised guidance on his website covering this. It includes an update to his Employment Income Manual, which now contains some useful examples for: (1) shop assistants; (2) utility engineers; (3) management consultants; and (4) financial advisors (BlackBerrys are specifically commented upon at EIM21701). eMploYeR tip In essence, the level of private usage of computer-related equipment provided by the company will not be the deciding factor. If it’s made available in order to carry out duties of employment in the first place, then employees are unlikely to be taxed on its private use. Have a written company policy governing the issue of each “device”. How can you include computers as an option? Where private use is going to be significant, offer the employee the use of a company-owned computer at home in return for them foregoing part of their salary/pay rise. Set it up as an agreement fixed for twelve months. This way you have a flexible benefit because neither party is tied into a three or even five-year contract over a computer. At the end of the twelve months you can both review the situation. Example Instead of taking a cash pay rise, you offer your employees the option of borrowing a company-owned computer (costing £1,500 ex VAT). The annual value of this would be 20% of £1,500 or £300 (£25 per month). So their total salary/pay rise would be reduced by £300 for the next twelve months. However, because there is no employees’ NI to pay on the computer, an employee paying tax at basic rate will be effectively saving £33 (£300 x 11%) that year. So having the use of a computer that would have cost the employee £1,762 (£1,500 + VAT) will, in fact, cost them only £300, plus income tax of £60 (£300 x 20%) on the benefit-in-kind. 12 special reports How to Reward Staff in a Tax-free Way 2008/9 What about selling computers to employees? The employee is free to buy the computer from the company after the salary sacrifice period has expired. The price paid only needs to be the market value of a well-used computer, which is likely to be significantly less than original cost. This is just as well as it’s unlikely that any company computer would be kept for five years (100%/20% p.a. = five years) because of the pace of technological change (in both hardware and software). KeY points • since April 6 2006 any computer equipment you provide for employees’ home use is a taxable benefit • have a policy which bans private use to avoid the tax charge • computer and related equipment provided before April 6 2006 is not affected - it can still be offered on a tax-free basis • offer to sell computers to employees as part of a salary sacrifice arrangement. 13 special reports How to Reward Staff in a Tax-free Way 2008/9 MediCal insURanCe Why provide private medical insurance as an option? Private medical insurance is one of the most popular benefits that you can provide to your staff. It’s advantageous to have a fit and healthy workforce and for any health issues to be dealt with quickly and effectively. Employees like it because it gives them peace of mind that they can get treatment when they need it. The most common scenario is that the employer arranges and pays for a group insurance policy, e.g. with BUPA or AXAPPP, under which the employees, and sometimes their families, are insured. The insurance company then meets the employees’ medical bills (subject to the terms of the policy, naturally). If you decide to include medical insurance as an option, then the employee will need to forgo a salary/ pay rise equivalent to the cost of the medical insurance premium. When is it taxable? The cost of providing employees with private medical insurance for treatment in the UK (even if it’s a group policy) is a taxable benefit if the employee is a director or is earning more than £8,500 a year (likely to be the majority of your staff) and, therefore, has to complete a P11D. If the employee is not a director and earns less than £8,500 a year (and has to complete a P9D), then there’s no taxable benefit. However, if the company pays a premium for a policy where it, rather than the employee, is the insured person and the policy enables the employer to pay for medical treatment, there’s no taxable benefit for the employee. Where there is a taxable benefit in respect of medical insurance, the employer is liable to Class 1A NI contributions at 12.8% on the cost of the benefit reported on the P11D. eMploYeR tip Although taxable, the big advantage is that the employee pays no NI on the cost of the medical insurance. This can be contrasted with the position that would arise if you simply gave the employee extra salary to take out medical insurance privately. In this case, an employee paying tax at the basic rate would have to pay 11% NI (a higher rate taxpayer would pay 1% NI). In addition, the employee would not be able to negotiate the savings available to the employer by taking out a group policy. 14