Review tax efficiency of employee benefits to counter cost of living

There is a cost of living crisis and it’s hitting employees hard, so what can employers do to help? The situation has been made worse by tax changes made in the recent Autumn Statement so are there opportunities for employers to be creative and help minimise the impact? We’ll consider that.

A reminder. In the Autumn Statement on 17 November 2022, the Chancellor of the Exchequer, Jeremy Hunt announced:-
- A change to the top rate of income tax affecting those on higher incomes. So, apart from in Scotland, the 45% ‘additional rate’ will be paid on earnings over £125,140, instead of £150,000.
- Income tax, National Insurance and Inheritance Tax thresholds will be frozen for further two years, until April 2028
- Personal allowances for income tax and  higher rate thresholds will be frozen for further two years, until April 2028

On top of that we have spiralling inflation so it is, effectively, a ‘double squeeze’. Inflation is leading to higher prices which in turn is leading to higher wage demands which are unaffordable for most businesses. Even if they are affordable, those employers do not want to be burdened with permanent wage hikes given that inflation is expected to come down for the next year or two as the government gets control of it again.  

So, is there anything employers do anything to counteract this double squeeze without increasing wages? One option is to see whether existing benefits could, perhaps, be offered in a more tax efficient way. Tax specialist Chris Thomas has been helping a number of clients with this in the weeks following the Autumn Statement, and earlier he joined me by phone from Birmingham to discuss the range of benefits that could, potentially, be adjusted to save tax and so help employees’ finances:

Chris Thomas: “The first one is making sure that people are making the most of pension contributions. In particular, if you've got employees who are making contributions from their net-after-tax-pay then you and they are missing out on some savings that could arise if you were to switch to a salary sacrifice model which, obviously, quite a few employers already do, but not all. It doesn't necessarily need to be a fully-fledged salary sacrifice scheme, which I know does put some employers off a bit. It can be relatively simple, but the advantage of it is that if they give up the relevant amount that they would normally pay in as contributions then, essentially, if it's paid directly as an employer pension contribution instead, you've got a saving of both employer NIC and employee NIC and some employers will choose to share their employer NIC saving so that creates a further benefit for the employee as well.”

Joe Glavina: “Isn’t the problem with salary-sacrifice that, by sacrificing some of your salary, you end up with less take-home pay which is not what you want in a cost of living crisis?”

Chris Thomas: “Well, I think for other forms of salary sacrifice, you're quite right, Joe, that the implication of salary sacrifice is you are reducing your salary and you are getting something else instead. Now, I think the point there is if the thing that the employee is getting instead is something that they would want, they could be getting it in a much more tax efficient way, and in a way that is much cheaper overall to them than they otherwise would. We are not necessarily talking about the very lowest paid employees here but, perhaps, the more middle earners. A good example of that would be electric cars which is really quite a tax advantaged option for an employer to provide. The way that essentially works is the employee enters into an a salary sacrifice arrangement to replace, essentially, fully taxable or NIC-able salary, with the benefit of the use of a car which is taxed at I think it's about 2% at the moment, so it's a really big saving, and obviously, we all know that a lot of electric cars are expensive, not everyone can afford to go out and buy one, but for people who are, perhaps, looking at wanting to do that, it's a way of making it affordable for them to do so in a very tax efficient way for both them and the employer - and it also fits in, and I know that's it’s not the purpose of this directly, but it fits in with the whole ESG and corporate responsibility agenda very well as well. So, it is a bit of a win-win from that perspective”

Joe Glavina: “Anything else on the list Chris?”

Chris Thomas: “So, I think it's also worth talking about things that, perhaps, are easier to roll out for everybody and don't involve having to give up any benefit at all and a good example of that would be providing free or subsidised meals to employees. That’s something that was, I think, done quite commonly many years ago, but as the become a lot less popular, perhaps, in recent times but it is something that actually can be quite a valuable benefit for employees. So, if you've got a staff canteen, as a lot of employers do, it is worth thinking about – could you provide free meals, or subsidised meals, or vouchers, that your employees can use there? So long as that's available to everybody, again, you can provide that without any tax, without any national insurance contributions arising on it? Yes, it's fairly small-scale on any one occasion but if you've got people who are using the canteen regularly, that could stack up to a few hundred pounds of savings over the course of a year, and it's the sort of perk, as well, I think, it's very relatable to employees, very easy to communicate, it’s perceived as a very accessible and attractive benefit. So, that, I think, is something that is worth thinking about if it's not something that you are currently doing.”

Joe Glavina: “Anything else on the list Chris?”

Chris Thomas: “So, the other thing that is worth thinking about, just briefly, and this won't be suitable for everyone, is loans if you want to help employees over, perhaps, a difficult period. You can do that, again, up to I think it's £10,000, the threshold, you could make loans to employees without any benefit in kind charge arising so you could make it at no interest, or very low interest, which could obviously be a significant benefit given the interest rates that we are seeing being a lot higher in the current climate. You do just need to check a couple of points around consumer credit, etcetera, but it should be possible to do it without any adverse implications and it's a quite tax efficient thing to do. In the past it was quite common with season ticket loans, but it doesn't have to be just for season tickets, it could be something that you make available more widely.”

On the subject of the Autumn Statement there were also changes made to minimum wage rates. Last month, following that announcement, Jon Fisher talked to this programme about how those changes may lead to breaches of the national minimum wage legislation if unchecked. That’s ‘Beware inadvertent overpayments after minimum wage rise’ and it is available now for viewing from the Out-Law website. We have put a link to it in the transcript of this programme.

LINKS
- Link to HRNews programme: ‘Beware inadvertent overpayments after minimum wage rise’