Between the Lines: Act now to reward staff before tax changes truly kick in

Many, if not all, businesses are cautious in light of the current economic uncertainty and concerned as to how this may impact on them.

As a result, boardrooms are focusing on the need to ensure that they have effective and competitive reward strategies in place to attract, motivate and retain the top talent, so that they are best positioned to navigate through further challenging times.

It is crucial that businesses have the right people in place not only to make tough decisions and keep their house in order, but also to react swiftly to the opportunities which will inevitably arise.

The key element in developing an effective reward strategy is to ensure it is founded on the overall strategic objectives of the business, aligning the interests of individuals with those of the business so that what is good for one is good for the other. During times of economic uncertainty, it becomes even more important that everyone is pulling in the right direction and that the business does not lose key people.

This can be particularly challenging during a period of downsizing, when perceived lack of security may lead to the loss of key people, given that very often these individuals are in most demand in the marketplace. Businesses also need to ensure they are maximising the value of their reward programmes, that is, getting the most "bang for their buck".

This might be, for example, by the introduction of flexible benefit arrangements to increase the effectiveness of employee reward, continual review of incentive plans to ensure that cash is being put in the right peoples' pockets, and ensuring effective communication to employees about the overall value of their reward package.

Given the economic climate, equity-based plans can be attractive where the company's share price is depressed as a result of the general state of the financial markets and this is not felt to be an accurate reflection of the state of the business, ie the expectation being that the share price will bounce back strongly.

From 6 April, 2010, the personal allowance for those earning more than 100,000 was restricted by 1 per 2 of income over 100,000, until the personal allowance is zero. For those earning over 150,000, the top rate of income tax is now an eye-watering 50 per cent.

For example, an individual with taxable earnings of 100,000 in 2010 and a bonus of 1,000 will pay tax of 400 (40 per cent) and National Insurance Contributions of 10 (1 per cent).

From 6 April, 2010, he would also see his personal allowance reduced by 500 (1,000 x ).

He will therefore bring a further 500 into tax at 40 per cent rather than at 0 per cent, an additional 200 tax liability. So the total tax and NIC paid on 1,000 is 610 - an effective rate of 61 per cent.From 6 April, 2011 the extra 1 per cent on NIC will increase this marginal rate further.

The combination of these substantial increases to income tax levels, together with the need to recruit, retain and reward key people will inevitably create significant tension between shorter- term income generation and longer-term incentivisation/value creation, given the chasm between the various capital gains tax rates of 10, 18 and 28 per cent versus a marginal income rate of up to 61 per cent.

Opportunities exist to structure tax-efficient overall reward packages for people key to the future success of your business.

Acting now, in advance of the changes to tax rates, will enable the business to maximise the reward it delivers to these key people, whilst minimising its costs of so doing, and ultimately help it win the war for talent in an unprecedented challenging environment.

l Susan Cruden is a senior tax manager with Grant Thornton in Scotland