The government announced the Health and Social Care Levy (the Levy) in September 2021. The Levy results in employees and employers being liable for an additional 1.25 per cent of employees’ and employers’ NIC for the 2022/23 tax year, and a Levy charge for the same amount from the 2023/24 tax year. For further details on the Levy, see 'How the new health and social care levy will affect PAYE for employers'.
Given the increased costs arising from the introduction of the Levy, and the changes to employees’ working patterns as we move towards the ‘new normal’ of hybrid working, now is an ideal time to review and make changes to current remuneration and benefit offerings for employees.
What areas can we consider?
Areas to consider could include:
- Paying the tax and NIC-free employees’ home working allowance. It should be ensured that qualifying homeworking arrangements are in place as coronavirus-related HMRC easements are removed.
- Introducing ‘HMRC approved’ salary sacrifice/exchange arrangements, such as those for employer pension contributions. These can reduce NIC liabilities for both employers and employees and facilitate increased pension saving (see below).
- Using employee benefits with a low value for tax and NIC purposes, such as electric company cars, perhaps in conjunction with salary sacrifice for wider employee participation (see below). It might also be sensible to consider benefits exempt from NIC (for example, annual medical screening or check-ups) and review the cost of existing benefits liable to NIC to identify cost savings (for example, could changing an existing private medical insurance provider reduce the cost of that benefit?).
- Implementing tax advantaged/approved share option schemes instead of ‘traditional’ cash bonuses (see below).
- Facilitating discounts on goods and services for employees to enhance their ‘spending power’ and overall financial wellbeing. This might be discounts on an employer’s own goods or services or via a staff discount platform. The tax and NIC implications should be carefully considered first.
What is salary sacrifice/exchange for pensions (SXP) and why is it important?
SXP is an arrangement in which an employee agrees to a reduction in their contractual gross earnings by an amount equal to their employee pension contributions and, in exchange, their employer agrees to pay increased employer pension contributions instead. If you are not already using SXP, it should certainly be considered as a way of reducing the impact of rising employment costs.
The savings stem from a contractual reduction in the employee’s salary that results in the employer and employee paying less Class 1 NIC, and the benefit provided in exchange (being increased employer pension contributions to a registered pension scheme) being exempt from NIC.
The employer NIC savings can also be shared with the employee through an additional employer pension contribution.
With the increase in employment costs due to the Levy, SXP is an increasingly important option given the NIC savings which can be achieved.
Employers already using SXP might consider checking if employee participation is as high as it could be and, if not, how participation can be increased.
Furthermore, all employers paying bonuses might consider making a bonus exchange for pension contributions available too.
SXP and bonus exchange for pensions must be implemented and documented carefully to ensure it is NIC effective, and employees should also be advised of the potential wider impact of entering into the arrangement.
Further information see 'What is Salary sacrifice for pension contributions?'
Why should we look at offering electric company cars?
Company car benefits are calculated by reference to the list price of the car multiplied by a percentage published by HMRC that’s based on the car’s CO2 emissions and fuel type. Additional considerations can be factored into the calculation, but this is the core approach to calculating the benefit in kind.
For a number of tax years, the rates published by HMRC for calculating the benefit in kind for petrol and diesel company cars have been increasing to make higher CO2 emission company cars less attractive due to the higher tax and NIC costs for both employers and employees.
Unsurprisingly, the rates associated with electric cars are much more favourable when calculating the benefit in kind.
For the 2022/23 to 2024/25 tax years, a fully electric vehicle has a 2 per cent rate, compared to a 37 per cent rate for a standard petrol car with CO2 emissions of 160g/km or above. To put figures to this , for a vehicle with a £50,000 list price, an electric car would produce a £1,000 annual benefit in kind compared to an annual benefit in kind of £18,500 for the ‘maximum charge’ petrol vehicle.
A move to an electric company car fleet reduces the wider running and fuel costs along with reducing the income tax and NIC payable by the employer and employee. Indeed, many employers have either already implemented, or are looking at implementing, arrangements for making electric cars available to all employees under salary sacrifice/exchange arrangements. This can be an attractive offering for employees, and the business mileage and employer NIC savings can make it attractive for employers too. Unlike many other benefits provided under salary sacrifice, a fully electric company car is not currently taxed and subjected to NIC by reference to the salary sacrificed. Furthermore, electricity is not a ‘fuel’ for company car benefit purposes so there is no other benefit that can be applied even when the employer pays to charge the car at the office or a third-party charging station.
What about tax advantaged share plans?
Offering a stake in the business can help employers to attract and retain talent and incentivise key staff.
Implementing share plans that qualify for tax relief is one way of achieving this. As these plans can be more tax and NIC effective than, for example, paying traditional cash bonuses, tax advantaged share plans may become even more relevant as employment costs increase due to the Levy.
There are a number of different plans to consider and the type of plan to use could depend on a number of factors.
Further information see 'Share, reward and incentivisation'.
How can RSM help?
Our specialists have extensive experience in helping companies with structuring remuneration and benefit packages. We can provide a sliding scale of support depending on your needs and tailor this accordingly, from:
- providing initial advice;
- assisting with implementation;
- preparing documentation and employee communications; and
- seeking HMRC clearance where appropriate.