For many businesses, retaining their top performing and most talented employees is imperative. Specific skills and company knowledge can be difficult (if not near impossible) to replace.
Increasing salaries or paying bonuses have unattractive tax and national insurance consequences for both the employee and the employer. So here’s some alternative options for you:
i) Share options
EMI (Enterprise Management Incentive) is a share scheme that aims to incentivise and retain key staff (in particular those paying over 40% tax on earnings) by rewarding them with equity shares in the business. As well as being an attractive employee incentive, EMI brings numerous valuable tax advantages to the business as well, particularly those that have fewer than 250 employees.
Employees are granted options to acquire a company’s shares over a period of time, provided that certain conditions are met. These criteria are set by the company when the options are granted, such as minimum length of employment or the achievement of performance targets.
It is possible that both parties won’t have to pay any tax or national insurance on the grant or exercise of the options. The employee will only pay capital gains tax should they decide to sell the shares. If the sale is 12 months after the original grant date, they should qualify for Entrepreneurs’ Relief and pay 10% on any gains generated.
If you are interested in EMI share options, you’ll need specific advice from us. Please do get in touch with either Michael or Rebecca who will be more than happy to help.
ii) Pension contributions
Making contributions into a pension fund is still one of the simplest and most tax efficient ways of remunerating employees. In addition, they can also be tailored to each employee. The business is entitled to claim tax relief on all contributions made, and it’s not classed as a benefit in kind for the employee. They’re receiving additional tax free pay that they will benefit from later in life, especially coupled with the introduction of flexible drawdowns on pensions.
iii) Offer flexible benefits
Flexible benefit plans allow employees to customise their own reward package. Common offerings include childcare vouchers, company cars, dental care plans and health insurance to cover themselves and their families.
Even though many of the above benefits will constitute a benefit in kind and both parties will incur a tax charge, it’s often more tax efficient than increasing salaries because of the national insurance savings.
If you have any questions, please do contact Michael Burgess on 01782 279615.