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 Award?

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

Encouragement 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 EIM06600.

  • 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 Payments

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 Employees

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.

And 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.