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Incentivising your staff

In today's employment market there is a lot of competition to attract the best person for your business and retain them in your employment.

Employers will compete on salary but also on additional benefits that they will offer their workers. From an employee perspective, they may see any benefits as a good thing as they are getting them for free but this is not always the case. Most benefits provided come with a cost to both employee and employer.

In this article I would like to pick out some of the more common benefits and show how much their provision costs the employee and employer.

1. Cash bonuses

Whether contractual or not, any cash bonus incentive will be taxed on the employee through their payroll and attract National Insurance (NI) and Income Tax.

For an employer, when considering what level of bonus to provide, it must be remembered that the cost to the business is gross bonus plus employers' NI of 13.8%. So a £2,000 bonus will cost the company £2,276.

However, you can also look on the bright side. This is an allowable expense reducing your taxable profit and therefore your overall tax liability for the year.

2. Employer pensions

Company pensions are now becoming commonplace in UK industries especially with the new regulations in force for UK employers to ensure they provide employees with a workplace pension through auto-enrolment.

This has started to reduce the perceived benefit to the potential new employee as it is becoming a standard that they should receive a pension. However, it can still be used to incentivise staff especially those in the higher earnings brackets who already pay high amounts of tax and have a lot of disposable income. Instead of a bonus, these employees may prefer a one off contribution to their pension. This contribution for them is made out of pre-tax earnings, so the contribution is deducted before income tax (but not NI contributions) is applied to their salary. The employer's cost is equal to the contribution provided and again is an allowable deduction for taxable profits.

The main consideration when offering this sort of incentive is to ensure the employee has enough of the annual allowance remaining for the year for them to actually benefit.

3. Share Incentive Schemes

Share incentive schemes are becoming a more popular way to incentivise employees. This is due to newer schemes created by the government to help UK businesses grow and, in turn, grow the UK economy.

There are two types of scheme: One is a non-tax advantaged scheme, the other a tax advantaged scheme.

The purpose of these schemes is to provide employees with an "option" to buy shares in their employer's company or group in which they can realise either regular dividends or capital gains on the growth in value of the shares purchased.

There are three key points in time which are required for a share scheme:

  • Grant of Option - This is the date on which the employee is given the right to purchase the shares. At this date the company will have a market value for the shares and based on this they will set a price at which the employee can purchase the shares in the future. This price is usually the current market value or discounted market value.
  • Exercise of the Option - This is the point at which the employee decides to take the option to buy some shares in the company at the agreed price. Note that an employee may choose not to exercise the option and it may lapse. Although the employee has to use his or her money to buy the shares this is still an incentive as the employee should gain at some point in the future, usually when they decide to sell their shares.
  • Sale of shares purchased under the scheme - At this point the employee should reap the rewards and realise a profit on the sale of their shares either back to the company or to a third party.

In the following table, I've highlighted the key points and possible tax for the employee:

For the company there would be costs of setting up the scheme and valuing the shares which are an allowable expense. Then if the employee decides to exercise their option the company will have a further allowable deduction for tax purposes which equates to the growth in the value of the shares between exercise and grant.

In choosing what scheme to opt for there are a number of factors to consider, as not all schemes will be available to all employees or companies. These factors include number of hours worked by the employee, value of shares to be granted under the option over, type of company and so on. When looking at the schemes you need both legal and tax advice. This is where the Jordans Group, with its unique set of companies, can assist. In one meeting you can discuss both tax and legal issues on potential schemes for your company.

 Nicola Morgan-Schulz

Nicola Morgan-Schulz
Associate Director, Corporate Services | Company Formation
T: +44 (0)117 918 1241

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