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10 Ways To Reward Your Staff Tax-Free

by | Jan 9, 2020

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How to reward achievement in a way that is tax efficient for you and doesn’t burden the staff member

At a recent nursery
event and speaking with a dozen of nursery owners, it was very clear that
recruitment, rewarding and retaining staff is the number one concern for
childcare businesses. According to Gallup’s research, only one in three workers
strongly agree that they received recognition for doing good work. Further,
employees who do not feel adequately recognized are twice as likely to say
they’ll quit in the next year.

So what if the tax rules allow you to reward achievement in a way that is tax-efficient for the business and doesn’t burden the staff member?

Here are some ideas to consider and discuss with your tax adviser.

  • £12,000 Tax Free Incentives To Join

You want to attract
the best to come and work for you. You’ve considered offering an initial
financial incentive to achieve this. However, a payment to induce someone to
take up employment with you will count as salary payment with tax implications
for you and the employee. But what if the payment you make to the employee is
deemed as a compensation for the loss of some right they had which is not
connected with you? Here’s what HMRC has published (ref EIM00710) “a lump sum paid to an employee on becoming
a director/employee of the company he worked for was held to be compensation
for the transfer to the company of the valuable business connections he had
built up for himself. It was not taxable as earnings”

Although the
payment won’t be taxed as salary, it will be taxed as capital gains tax. And
because everyone is allowed £12,000 tax free allowance, the staff member
receiving upto this amount will not be burdened by tax.

  • £8,000 Tax Free Expenses

If you take on an employee who lives more than
a reasonable commuting distance from the nursery and they move closer work, did
you know you can pay them up to £8,000 tax free amount to cover relocating
expenses like moving costs, stamp duty, legal fees and new furnishings?

This recognition may well set the tone for the
new relationship and there is no tax or national insurance to pay. Plus the
business gets to deduct this expenses against its income.

  • £5,000 Tax Free

You want to
recognise a staff member for their outstanding contribution to your business
and for going beyond their call of duty.

Did you know you can pay your staff
tax free income for suggestions that benefit your business? Yes you can and
actually there are two kinds of awards:

  • encouragement
    awards – for good suggestions, or to reward your employees for special effort
  • financial benefit
    awards – for suggestions that will save or make your business money

awards are tax free up to £25. But financial benefit awards are exempt up to
£5,000. That’s right £5,000.

But before
you go ahead and pay the staff member, please note that as will all tax reliefs
and tax exemptions, there are conditions to meet. Refer to HMRC reference

  • Tax Efficient Vouchers

If you give your
employees cash vouchers, the amounts would need to be put through the payroll
and subject to tax and National Insurance. However non-cash vouchers up to £50
may be exempt under the trivial benefit rules. Where the voucher exceeds £50,
you will need to report these on a P11D form to HMRC.

  • Tax Free Gratuitous

Normally payments made to staff for their outstanding services would
count as salaries unless specific exemptions apply. Once such exemption is a
genuinely gratuitous payment that the employee was not expecting and had no
right to receive. And a payment made merely to recognise their generous nature.
There must not be a regular pattern to these payments and do check with your
accountant before proceeding.   

  • Tax Free Gifts To

Gifts you give to
your employees are normally exempt from tax and NI. However this exemption only
applies if the gift is deemed to be trivial. For a gift to be considered a
trivial benefit, it must cost £50 or less, and not be part of the employees’
contract or a reward for performance. It must also not be a cash reward as HMRC
will tax this as earnings (payroll tax). So classic gifts including a bottle of
wine or box of chocolates would be exempt from tax.

  • Tax Efficient Share Schemes 

Employees want to feel valued and part of the business. According to
Gallup and the Harvard Business Review, employees want to work towards a
purpose driven common goal. So if you want to follow the success of John Lewis
in creating the ownership mentality, then there are tax efficient ways of doing
this. They are called Approved Share Option Schemes and something to discuss
with your accountants.

  • Tax Free Medical Cost

Where an employer
pays for the cost of staff medical insurance, the staff member will be taxed on
the value of the insurance as benefits in kind. However there is a specific
exemption that allows the employer to pay for employees to have private medical
check-ups without any tax implications on the employee. So this could be health
screening assessments, medical check-ups or eye tests.

  • Up to £1,000 Long Service Award

Let’s say you have an employee who has
worked for you for a very long time. And it’s time to move on. Did you know you
can give them a non-cash award of upto £1,000 if certain conditions apply? Think
about the goodwill this will create among existing staff members. Search HMRC’s
site for long service award for more details.

  • Tax-Free Holiday (Business Trips With Perks)

If you or your employee decides to
look for business opportunity or take your laptop with you while on holiday, no
element of this holiday costs can be claimed. However where the purpose of the
trip is for business with perks including sauna, round of golf, free dinner and
the likes, there will be no tax implications for you or the staff member.

Finally….Just Say Thank You and Mean It From Your Heart

Staff recognition and reward isn’t one size fit all. Besides money or incentives are not the only form of recognition. Why not try a simple, sincere and meaningful THANK YOU.

ja PIC 1


Jonathan Amponsah CTA FCCA is an
award-winning chartered tax adviser
and accountant who has advised
many clients over the last decade
on tax.

He has successfully defended clients
against HMRC at the tax tribunal.

Jonathan is the founder and CEO of
The Tax Guys.