Employee Remuneration

The start of a new tax year is always a good time to review your remuneration packages and benefits and expenses policies. It allows you to determine if your existing arrangements are in line with current market trends and to take into account HMRC's present way of thinking.

The Finance Act 2006 saw the introduction of the first retrospective legislation with regard to what HM Revenue & Customs (HMRC) considers to be unacceptable tax and National Insurance (NI) avoidance relating to the way earnings and bonuses are paid. This does not, however, mean that employers should just pay cash and accept the tax and NI consequences.

There are still tax and NI-efficient ways to remunerate employees and best practice is to maximise these. There are a number of benefits which have special tax treatment, such as childcare vouchers and parking near a place of work, but these have limited application due to monetary limits and the nature of the benefit provided. The most effective benefits for providing more significant savings for each employee are employer contributions to a registered pension scheme, and HMRC-approved share option schemes.

Unlike pension contributions made by an employee, which are subject to NI, employer contributions to a pension scheme do not incur a NI charge for either the employee or employer. It is therefore possible to maximise NI savings by arranging for what would have been an employee contribution as an employer contribution through a salary or bonus sacrifice.

HMRC-approved share schemes remain an effective way of providing significant tax and NI savings. Often the gains arising on the sale of shares acquired under an HMRC-approved scheme can be subject only to capital gains tax at an effective rate as low as 10%. For those employers who find the HMRC schemes too restrictive, or where the monetary limits have been fully utilised, there are additional methods of providing tax and NI-efficient remuneration through, depending on the employing company's tax position, employee benefit trusts and unapproved share plans. We are finding employers are considering a combination of these unapproved arrangements as a useful addition to their overall reward strategy and structure.

While reviewing your benefits and expenses policy, it is important to keep in mind current HMRC trends. We are, for example, aware of a change in attitude towards the provision of taxis home when an employee has been required to work late (beyond 9pm). HMRC...