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KEY POINTS
- Review employers’ benefit packages.
- Prepare for pensions auto-enrolment.
- Care with key man insurance policies.
- Value of flexible benefits.
Imagine you have a client who says to you: ‘I am thinking about taking on a new member of staff, how can my business make some tax effective payments to them and structure the remuneration to maximise the available reliefs?’
It would be nice to have this conversation with a client from time to time but, in reality, it is a rare occurrence. With the increases in personal tax and National Insurance rates, I think it is timely to go back to employers and think again about the way in which they structure their remuneration packages.
All of this is subject to the potential merger of the administration of the taxation and National Insurance systems, but I will proceed on the basis that, for the time being, these regimes will continue largely as they are.
There are a number of areas where you can be talking to clients to make sure they maximise their spending power.
In essence, this means taking full advantage of the tax reliefs available to maximise both the profits of the business and the net remuneration of the staff.
For the purposes of this article I am going to ignore share options and instead look at some other benefits that are commonly on offer and that should be readily available.
Pensions
The first and possibly most important area is pension provision. Readers of this magazine will know that auto-enrolment into employer pensions is imminent.
The effect is that employers will have to provide a pension scheme with an employer contribution of at least 3% for all employees (unless the employee opts out of the scheme). The phased introduction of the scheme begins next October for the largest employers and will be concluded in 2016.
Rather than wait until you are compelled to do this, it might be worthwhile accelerating auto-enrolment, so that over a couple of years staff get (say) part of a pay review commuted into an employer pension contribution.
These contributions are subject to tax relief for the employer against their profits and they are effective for National Insurance purposes in that no employer or employee contributions are payable on pension contributions made directly by the employer.
It may also be helpful to open a dialogue with employees to extend this benefit to other pension contributions that the employees might already be making. It is perfectly feasible for the employer to take on responsibility for the employee’s private pension arrangements and for there to be a National Insurance benefit.
It is more straightforward if this is an employer-arranged pension scheme, but it is technically feasible through a personal pension arrangement, albeit slightly more complicated from the pension scheme provider’s perspective.
Employers will have to be careful about existing pension arrangements to make sure they do not fall foul of the auto-enrolment conditions. Professionals in the financial services industry can help with that aspect as well as the other points referred to above.
The 3% employer contribution is unlikely (on its own) to reach the £50,000 contributions limit per person.
It is, however, important that recipients are aware of their total pension arrangements and overall contribution levels. It would be unfortunate if an employer pension arrangement such as this were to trigger a charge for excess funding into the scheme.
The key message with pension arrangements is to look at the contributions made by an employee and an employer.
Where the employer makes a contribution rather than the employee (possibly by way of salary sacrifice) then some significant National Insurance savings will be obtained by both the employer and the employee. In this way, the same amount is put into the pension scheme, but the overall cost is reduced.
Incapacity
Section 307 of ITEPA 2003 states that no liability to income tax arises by virtue of ‘provision made by an employee’s employer … for a retirement or death benefit’. The point is that the provision needs to be made through a registered scheme and would therefore cover death-in-service lump sums. No National Insurance arises on these payments.
I have seen increasing use of this kind of policy for director-style life cover where previously there was the limit of four times the salary. It seems that this is no longer a problem following the change in the legislation of 2006.
Prior to that point there had been a cap on the contribution levels that would equate to a policy providing a payout at a level of four times the salary; this change was a consequential amendment.
In a private company environment, we are seeing an increase in the use of this provision to provide life insurance for directors.
This is a significantly higher level than under their previous arrangements as the salary link has been severed. It allows for an owner/manager to have the benefit of death-in-service cover without necessarily having a substantial salary.
Key man insurance
Key man insurance is written so that either the company or another individual gets a payment as and when the insured life expires (or rather the person dies).
The prevailing practice of HMRC has been and continues to be that, provided the business making the payments does not claim corporation tax relief on the contribution, any payout is not taxed.
The position is more complicated when the policy is written to pay an individual. It is a common misconception that this payment is made by the company and therefore treated as a benefit in kind on the intended recipient of the money.
This is not correct as the parties to the policy are independent of the company and any potential payout from the policy would be to the individual.
The payment of the premium on key man life insurance policies where the life insured and potential recipient are individuals must always be treated as a transaction between the individuals and the life companies.
If a company makes the payment on behalf of the individual that must be treated as a payment towards net pay, what used to be called settlement of a pecuniary liability, and income tax and National Insurance should be applied on a grossed-up basis on each payment.
A misunderstanding on how such premiums should be treated can quickly create monthly underpayments of PAYE, so care should be taken in relation to this kind of policy. The same applies to other costs expended by the employer on behalf of the employee where the contract is in the name of the employee.
The most typical example of this is a mobile telephone contract that, for expediency, is in the name of the employee but the employer picks up the bill and pays it for the employee. Once again that will be a pecuniary liability.
Flexible benefits
There are many ways that an employee’s tax position can be improved by slightly altering the manner in which he is paid or in which he receives a benefit, as the previous section about mobile telephones and the key man insurance policies illustrates.
The whole premise of flexible benefits is one of salary sacrifice. Employers are increasingly moving towards a total reward package.
By sacrificing some salary or repackaging a pool of benefits into a flexible benefits arrangement staff can obtain a more flexible financial arrangement with their employer and, it is to be hoped, reap some tax or National Insurance savings along the way for both the employee and employer.
From an employer’s perspective, the reason for offering flexible benefits is twofold. First, they assist with the motivation and retention of staff in a competitive market, but second they obtain a better financial result.
The employee benefits in that he may end up with a higher total remuneration, and he also gains access to a number of benefits at a lower cost than would otherwise be the case. So this is a ‘win win’ situation.
Good for all
In summary, the increases in National Insurance contributions and the prospective changes in the administration of the PAYE system are putting the focus on mitigation of the expense of providing employee benefits.
If tax can be saved along the way and the business’s profitability improved at the same time, then this has to be good news.
Simon Massey is a tax partner at Menzies LLP and can be contacted on tel: 01483 755000 and on email
