While the complexities of taxation can seem more than a little off-putting to HR professionals, it is worth getting to grips with the law as the tax-saving advantages of flex are too great to dismiss, says Debbie Lovewell
Case study: National Grid Wireless
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Nineteenth-century American novelist Ralph Waldo Emerson is widely quoted as having stated: "For every benefit you receive, a tax is levied." The good news is that this is no longer the case and nowadays there are a number of benefits organisations can offer their staff that attract tax-saving advantages for either employers, employees or both. The bad news is that, for the uninitiated, tax can appear notoriously complex and difficult to understand. If you feel this way, however, you are in good company as physicist Albert Einstein once said: "The hardest thing in the world to understand is income tax."
Unfortunately, employers looking to implement a flexible benefits scheme for staff will need to understand tax issues if the plan is to achieve its full tax-saving potential. Lesley Fidler, director, employer consulting group at Baker Tilly, says: "The first point is to get a proper understanding of how the tax works. Given it is key to the financial success of the scheme it is often advisable not to go it alone. The employer has to be clear about why they are providing the flex scheme. If they don’t know why they are doing it, the communication will probably be unclear, so it’s likely to have a very low take-up and be a pain for all involved." One of the first issues is to identify how individual perks are taxed. Several benefits can now be offered through flex schemes which attract tax and National Insurance (NI) savings for both employers and staff.
These include childcare vouchers up to a limit of £55 per week, one mobile phone per employee, bikes for work schemes, health screening, luncheon vouchers up to a limit of 15p per day, pension contributions up to approved limits and PCs bought through home computing schemes launched before this year’s 6 April deadline when the tax breaks were axed. These are typically offered through salary sacrifice arrangements whereby employees agree to give up a portion of their pre-tax salary in return for a benefit provided by their employer.
Steve Charlton, head of health and risk consulting at PSFM, explains: "In principle, you have to give up potential future cash before you receive it. In sacrificing salary you’re entering into an agreement with your employer." This enables employees to save up to 41% on income tax and NI if the benefit is not liable for either of these charges and up to 33% in cases where these taxes are payable. Employers can also save up to 12.8% on NI on the amount of gross salary sacrificed. When setting up a flexible benefits scheme which incorporates salary sacrifice, organisations do not need to gain HM Revenue and Customs’ (HMRC) approval beforehand, however, there are several measures employers are advised to take to ensure they don’t fall foul of tax regulations further down the line. Simon Parsons, product manager for payroll and legislation at Ceridian, explains: "For salary sacrifice to be effective, there needs to be evidence of some kind of contractual change.
What [HMRC] will say is ‘[organisations] can use the salary sacrifice but if it can’t find any contractual changes, it will charge the tax’." Where flexible benefits are offered through salary sacrifice mechanisms, employers also need to ensure lower-paid staff do not sacrifice their pay below the national minimum wage. Gary Hull, director of HR services at PricewaterhouseCoopers, says: "The employer has obligations as far as employees are concerned." The same applies where employers operate variable pay schemes. "You’ve got to make sure variable pay doesn’t drop below the national minimum wage, but it doesn’t have to be calculated on an hourly basis," explains Fidler. If employees do drop below this level, organisations could be placing themselves at risk of being taken to an industrial tribunal or reported to HMRC.
Employers also need to be aware that the manner in which a particular benefit is offered could also affect its tax status. Parsons explains that many of the taxable benefits offered through flex are reportable through P11D and attract class 1A National Insurance contributions (NICs). If employees opt to flex up the level of cover they receive under private medical insurance (PMI), for example, their decisions will need to be reported under P11D. Many employers prefer to tax benefits-in-kind through payroll systems, which is against HMRC policy, although many local tax offices will approve the practice.
Benefits that incur Class 1a NICs, however, must be reported through P11D. "Tax offices will quite often require [organisations] to provide lists of the benefits they have provided instead of P11D. Make sure that if it’s a P11D-reportable item and you’ve taxed it through payroll [that you’ve got] agreement from the local tax office," says Parsons. Employers may also need to take value added tax (VAT) into account when implementing a flexible benefits scheme. Where products have an element of VAT in the cost, employers may be able to recover this, which will then enable them to charge staff the value net of VAT. Tony Morgan, director at KPMG People Services, explains: "The important point here is to bear in mind that the amount of salary sacrificed doesn’t have to be linked to the value of what is being provided." In these instances, organisations may hit problems if they calculate a salary sacrifice arrangement on the cost of a product exclusive of VAT. When VAT is added, however, it may exceed the limit at which a product is considered tax-efficient.
Employees will then be liable for benefit-in-kind tax and NICs, while employers will have to pay NI. "The difficult bit then is you have to go back to employees and say ‘we got it wrong and you have to pay some tax’," adds Morgan. Alternatively, some employers will cover the additional tax costs. So understanding the VAT-position on benefits before schemes are implemented, is important. "Especially for medium-sized and larger organisations, it can make a real difference to the business case. If you think in the broadest sense about what you provide to [staff] and how you deliver that, you can make some significant savings," says Morgan. While it may initially seem complex, it is worth taking the time to understand the tax implications of a flex scheme before it launches. "If you get it right, it works as smooth as silk. If you don’t get it right, the consequences are almost disproportionate compared to the inconsistencies," says Morgan.
Perks and their tax concessions
Free of tax and National Insurance (NI) within limits: Childcare vouchers up to £55 per week Employee health screening Learning and development On-site meal vouchers Bicycles for work Mobile phones (limited to one per employee) Staff suggestion scheme awards Car parking at or close to the workplace Long service awards over two years Social functions up to a limit of £150 per head per year n Free or subsidised travel for staff Sporting or recreational facilities Workplace nurseries Welfare counselling
Case study: National Grid Wireless
When National Grid Wireless launched its flexible benefits scheme in December last year, it called on its in-house tax advisers for assistance. Their advice was particularly useful when identifying which benefits were tax-exempt because the flex scheme is based on salary sacrifice arrangements. Bruce Sayers, reward and policy manager, explains that it offers all perks in this way, not just those that are tax-efficient, to ensure the scheme remains consistent. All taxable benefits, such as private medical insurance and critical illness cover, are then reported through P11D. "We are producing slightly more in the way of P11Ds but we were producing a large number anyway because of company cars so it [isn’t] too much of a burden," explains Sayers. Where the benefits produce tax savings, the company was keen to avoid those that it fears the government may revoke the tax advantages on such as bikes for work. Sayers adds: "We’ve tended to go for benefits where we think the tax regime will stay for some considerable time."