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Tax efficient employee incentives


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All businesses are reporting increased competition for securing and retaining the services of key individuals. Friend Partnership look at tax efficient employee incentives that are available following recent changes to HMRC rules, and why businesses should consider being flexible to attract potential employees.

The remuneration policy of any business will be an important element for potential employees and existing employees to consider when deciding to join or stay with a business.

It is clear that non-monetary items can be as important as basic salary and benefits for an employee.  For example, annual holidays, maternity and paternity leave, breakout areas and easy chairs and slides in reception can win the day for the services of some individuals.

In recent years HMRC have changed the rules, meaning some remuneration arrangements are now no longer possible.

The rules for salary sacrifice schemes have changed dramatically. Such schemes were used to enable individuals to sacrifice salary in return for benefits in kind.  This had various advantages, not least of which was the saving in tax and national insurance.  However, now salary sacrifice schemes are restricted and can only be used to cover pension contributions, cycle to work and certain childcare arrangements.

There are still many benefits that can be provided by employers which will be attractive to a wide range of prospective and existing employees.

The most important of these are:

  • Pension arrangements;

  • Cycle to work schemes;

  • Season ticket loans;

  • Workplace parking;

  • Mobile phones; and

  • Canteen meals.

However, the above may not be attractive enough for ambitious individuals who may want something more.

This is where the promise of an equity stake in the business can be highly attractive for many individuals.  For medium size companies the most useful mechanism by which this can be achieved tax efficiently is the Enterprise Management Incentive share option scheme. For more information, please see my previous blog on the subject.

If everything is set up correctly this gives a tax efficient incentive for employees where tax is only payable as and when they sell the shares they acquire under the scheme. The company has ultimate flexibility in that performance targets can be set, and the option agreement can be terminated as and when an individual leaves the company.

The offer of a potential equity stake in this manner acts as a lure to help recruit individuals – and a handcuff to ensure that they stay with the business.  Existing owners of the business should never fear the potential dilution, because of the additional minority employee shareholders, because the value of their reduced shareholding should increase because of the efforts put in by the individuals with a minority stake.

Businesses need to be flexible when it comes to their remuneration arrangements because one size does not fit all. If they are not offering what a prospective candidate wants it is likely that another employer will.

For help or advice on tax matters for you or your business, click here to get in touch.

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