Tax efficient incentives help manage rising wage demands - Chantelle Martinez

The current economic climate is creating a Catch-22 scenario for UK businesses where rising inflation makes it difficult for many to bear the cost of further salary increases while the cost-of-living crisis sees growing numbers of employees seeking higher wages.

Last month’s increase in interest rates added further fuel to the fire making it even more challenging for both businesses and workers. With demands for pay rises set to continue, employers must carefully consider how they can incentivise their staff while keeping a lid on expenditure.

Part of the solution could lie in the use of tax efficient benefits which can help alleviate growing financial pressures for businesses. These come with minimal or no tax obligations, and can provide tangible support to employees.

These include salary sacrifice benefit schemes which enable an employee to give up a portion of their gross income to fund certain benefits. This approach generates an income tax and Class 1 National Insurance (NI) saving for the employee and NI savings for the employer.

Chantelle Martinez is an employment tax specialist at Chiene + Tait

Provided a worker’s earnings remain above the minimum wage and there is consultation with the company’s HR and legal teams over any potential impact on an employment contract, there is no further limit on the amount of salary sacrifice an individual can choose. The ‘sacrificed’ funds could then be put towards other tax efficient benefits including the monthly lease costs of an electric car or a new bicycle for commuting to the office through the Cycle to Work Scheme.

A salary reduction in lieu of increased pension contributions provides another opportunity which can benefit both employee and employer by lowering tax and NI contribution levels. While it will not suit all workers, especially those on lower pay and those with modest levels of disposable income, the use of salary sacrifice for pension contributions typically sees employees increasing their overall take home pay through associated tax-free benefits.

Additionally, there are smaller ‘trivial’ benefits, including gift cards and supermarket vouchers, which can further incentivise employees in a tax-efficient manner. Such benefits are however limited in their impact as they must not exceed £50 and can only be provided on an ad hoc basis as the tax exemptions would not apply if they became a regular aspect of monthly remuneration.

For businesses that do not currently provide this for their staff, offering a company-funded mobile phone is another benefit that is free of tax or NI charges and one that addresses cost-of-living concerns by eliminating an existing monthly living expense for an employee.

Providing free or subsidised meals at a workplace canteen is another useful staff incentive which can deliver valuable support over time. As long as this is offered to all employees, it can also be a financially prudent measure as it too is an income tax and NI-free benefit.

For those employees most affected by the financial pinch, providing a loan of up to £10,000 is another significant benefit that companies can provide as this can also be done with no requirements to pay income tax or NI.

Implementing a range of these and other tax-efficient benefits can increase employee retention while keeping rising costs under control during this period of high inflation. For some employers, that could be the difference between success or failure within this challenging environment.

Chantelle Martinez is an employment tax specialist at Chiene + Tait