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How to retain staff without just increasing salaries
With the current cost of living crisis, businesses face increased payroll costs as employees seek pay rises to keep pace with inflation. However, many businesses are themselves suffering from increasing costs which are squeezing margins and reducing profitability meaning there simply aren’t the funds available to increase salaries. On top of this, there is of course currently a Social Care Levy which increases national insurance payable on wages by 1.25%. So, for 2022/23, the main rates of national insurance are 13.25% for employees and 15.05% for employers.
Against this backdrop, employers are faced with the unenviable task of ‘squaring the circle’ – how do you keep your staff happy without increasing salaries?
There are a few ways that employees can be rewarded at no cost to the employer.
Salary sacrifices now only applies to:
How salary sacrifice works
An employee can choose to reduce their salary in return for any of the above benefits. The advantage of this is that the employee saves income tax and national insurance (NIC) on the amount sacrificed. Taking a simple example of a salary sacrifice of £200 per month, the net cost to the employee of the salary sacrifice will depend on their tax and national insurance rate. For example:
Basic rate taxpayer Higher rate taxpayer
Main NIC rate applies 2% NIC rate applies
Income tax saving 40.00 80.00
NIC saving 26.50 4.00
Total saving 66.50 84.00
Based on the above, the employee can have an additional £200 paid into their personal pension plan at a net cost to them of £133.50. Also, the employer does not pay national insurance on the £200 salary sacrifice (saving around £30) which the employer can either retain or choose to also contribute to the pension.
Electric car schemes
There has recently been a huge push towards electric cars, these can offer significant savings for both the employee and the employer. As in the example above for pensions, the salary sacrificed saves tax and national insurance and again the employer can choose whether to pass on any national insurance savings to employees (effectively by reducing the amount the employee has to sacrifice).
The employee is assessed to a benefit-in-kind on the provision of the electric car, but this is only at 2% of the list price for the current year.
There is some detail to go through to successfully implement an electric car scheme – the employer needs to consider insurance, servicing, repairs, home charging points etc.
Another important factor is that the employer should be able to claim capital allowances on 100% of the capital cost of the electric car.
Cycle to work schemes
The latest state-of-the-art bikes can be expensive and serious cyclists may like the idea of acquiring a bike through salary sacrifice. Note that if the cost of the bike is over £1,000 the employer will need authorisation from the Financial Conduct Authority.
Again, the salary sacrificed saves tax and national insurance and the employer can choose whether or not to pass on NIC savings to the employee.
The bike is effectively hired to the employee for a specified period (usually 12 to 18 months). The employee can also claim 100% capital allowances on the cost of the bike.
At the end of the hire period the employee usually buys the bike at the then market value. For a bike costing £1,000 HMRC will accept that the value after 18 months is only £210.
Share schemes and incentive plans
There are several share schemes that can be implemented which do not involve a cash outlay, except for the legal and professional costs of implementing the scheme.
Enterprise Management Incentive (EMI) Schemes
The main conditions that need to be satisfied for EMI schemes are as follows:
EMI share options are often used as an incentive for a future exit event. The net proceeds are subject to capital gains tax and are eligible for Business Asset Disposal Relief (“BADR” -formerly Entrepreneurs’ Relief). The annual capital gains tax allowance (currently £12,300) is also available to set against any gains.
Company Share Ownership Plans (CSOPS)
There are virtually no restrictions on eligible companies – there are no restrictions on the size of the company or qualifying conditions, but as with EMI the company must not be controlled by another company. As with EMI there is no requirement to include all employees in the scheme.
The major disadvantage of CSOPS is that the maximum value of share options that can be granted is £30,000.
Again, the options qualify for capital gains tax treatment but do not qualify for BADR.
Growth share schemes
Growth shares do not have the same tax advantages as EMI shares but can nevertheless be an effective incentive for employees.
A new class (or classes) of shares are created which participate in value over a set ‘hurdle rate’. It is usual to set the hurdle sufficiently high so as not to cause any valuation issues with HMRC. For example, if a company is worth £5 million, a hurdle rate of £5.5 million might be appropriate. The growth shares only participate in some or all the value above £5.5m and again this would commonly be used as an incentive with a view to an anticipated sale of the company in the future.
Unapproved Share Option Schemes
Such schemes are also sometimes referred to as Long-Term Incentive Plans (LTIPS).
The employee is awarded share options, usually at the current market value of the shares. There are no immediate tax implications but when the options are exercised the employee is subject to income tax on the difference between the price paid (usually nil) and the market value at the date of the grant. Usually, only income tax is payable on unquoted shares. Any growth in excess of the initial market value will be subject to capital gains tax, although BADR will not be available.
Nil paid shares
Here the employee is given shares at their market value, but the balance payable is left outstanding and is usually issued with a planned future exit in mind. The amount outstanding is treated as a beneficial loan which means the employee pays a benefit in kind each year until the exit. Where relatively small numbers of shares are involved, this can be extremely tax efficient since there is no benefit in kind for beneficial loans below £10,000.
Employee share schemes are widely used as an attractive way to reward and retain employees. They continue to be a popular remuneration tool, with recent figures from HMRC showing increases in the use of these schemes. Please get in touch if you have any questions about employee share schemes.
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