You would think in these difficult times, the executive team would have more important things to think about, but their self-interest is immune. One of the guys in C-suite has asked us to focus on making executive benefits more tax-effective. Well, that’s not exactly what he said; in fact, he told Big Bad Boss to find a way for him to personally pay less tax. Of course, Big Bad Boss could have told him to ‘earn less’, but he didn’t. Instead, he dumped a tax-efficient benefits project on me. This isn’t the first time I’ve been asked to look at tax; the executive management team are properly obsessed with it. The problem is there is relatively little we can do about it, I mean, who can argue with HM Revenue and Customs (HMRC)?
In the past, some of our senior guys have asked for split pay; in other words, for part of their salary to be paid abroad in some low-tax haven. Well, we don’t do that and we are not going to start now. Offshore arrangements are expensive, complex, and a tax and legal minefield. If executives want to go that route, they need to pay to set it up themselves, take the risk themselves, and do it all out of taxed income. As long as they have paid tax on their income here, they can put their net pay wherever they like. Often, when they give me grief about pay, I suggest a suitable place to stick it (but only in my head).
On a similar theme, we once discovered a few managers working in Switzerland (the highest pay band in Europe), who were actually commuting from just over the border in Italy where cost of living is much lower, but even those anomalies seem to have gone away. I am guessing the local tax laws made it more difficult.
Tax laws have changed here in the UK too. Salary sacrifice advantages have been scaled back. Although we do what we can to encourage participation in what is left, the take-up beyond pensions is actually pretty minimal, particularly among the executive team. The bikes-for-work plan is barely used, and take-up is unlikely to increase when so many are working from home. I just hope I never have to see Big Bad Boss in his lycra shorts again. Shudder.
Share schemes
We do have an HMRC-approved share incentive plan. If employees keep the shares for five years, they don’t pay any tax on the shares. They may pay tax on any dividends, and they also pay capital gains tax if the value of the shares has increased when they sell. With the share price at an all-time low, it could be a great time to buy. I add the share scheme to my tax communications plan, reminding everyone that share prices can go down as well as up (as if anyone could forget that right now).
Sometimes the Higher Beings ask about deferring their bonuses, but that only saves tax if the executive is in a lower tax band when they ultimately take the cash. In the case of our Higher Beings, their earnings just go up and up, so putting off the inevitable tax bill doesn’t really help.
Pensions
Perhaps the most tax-efficient way to defer income is to put it in a pension. That way, the employee saves tax on the income going into the pension and gets 25% tax-free when they take the money out on retirement. Although we’ve done some education fairly recently, it’s surprising how little people understand about pensions. This project from the Higher Beings could be a great opportunity for me to offer more pensions education, and we can do that for everyone not just the higher earners. I can argue this is a tax-free benefit too, as long as we do not spend more than the annual allowance.
Sadly, proper time with an independent financial adviser (IFA), advice to tell you what you should do rather than just what you could do, comes at a much higher price than the tax-free allowance covers. However, for executives, we offer a special allowance towards financial planning. This is really where Higher Beings should be looking for answers to their tax woes. Perhaps, on the back of this project, I can get the provider to do another session on its services.
High tax bills
Overall, all I can do to fulfil the brief is put together a list of tax-effective benefits options available, all of which we currently offer anyway. Contrary to what you hear in the media, nobody on the payroll can escape the taxman, however senior they are. The world gets very emotive when they hear about seven-digit salaries and fat-cat bonuses, but they never mention the seven-digit tax bills that go along with that.
Yet, if you do the maths, even a middle-earner paid close to the upper earnings limit will barely pay enough tax over their lifetime to cover their own state benefits. So where do we get off pointing the finger? It is only higher earners who are net taxpayers, the rest of us are, in fact, tax-spenders. Perhaps general indignation at eye-watering salaries is misplaced, when there are similarly huge amounts of tax taken off. Of course, it is right and proper that higher earners should pay more tax, but let’s not, in our envy, forget the overall size of their contribution to HMRC compared to the rest of us.
That doesn’t mean I’m on board with saving the Higher Beings from paying tax, far from it: their taxes are funding everyone else. All I am going to do is remind them of the legitimate schemes that we already have in place. I just hope they don’t notice they have heard it all before.
Next time… Candid looks at wellbeing apps.