View the related Tax Guidance about National living wage
Bonus and incentive schemes — legal points
Bonus and incentive schemes - legal pointsMany employers operate bonus or incentive schemes in addition to paying basic salaries to their employees. Such schemes will normally make it clear whether entitlement is discretionary or contractual.Discretionary bonuses usually give employees a contractual right to be considered for a bonus or incentive payment under the scheme, but not necessarily to receive one. In the absence of express agreement a bonus entitlement may be implied on the basis of established custom and practice, eg a right to be paid a Christmas bonus may be implied where it has been paid to all employees for a number of previous years (see Frischers v Taylor (unreported EAT 386/79)).Any bonus entitlement should be included in the employees' written statement of employment particulars. See the Written statement of particulars or terms and conditions and Definition of wages guidance notes. Bonus schemes are generally intended to ensure that employees focus their efforts on key objectives of their employer's business. The benefit for the employee is that he may receive greater financial reward. The benefit for the employer is that employees are motivated to work harder and not lose their bonus entitlement by leaving employment.Where a bonus is paid in cash, it is liable to PAYE tax and Class 1 national insurance. Bonuses paid in kind are taxable in accordance with the benefit in kind rules.Types of schemeMost bonus schemes link bonus payments to some measure of performance. In this way they can be used to motivate employees.
Flexible benefits schemes ― an overview
Flexible benefits schemes ― an overviewAn introduction to flex schemesA flexible benefits scheme allows an employee some degree of choice in how their remuneration package is structured. The terms ‘salary sacrifice scheme’ and ‘flex scheme’ are often interchangeable, because they usually refer to the same thing. The main difference, if there is one, is that ‘salary sacrifice’ may refer to a degree of employee choice given on a single employment benefit. A flex scheme on the other hand often applies choice to a number of different employment benefits at the same time, therefore the considerations on implementation are more numerous.This document sets out the basics of how a flex scheme might work, alongside the usual steps involved when implementing a successful scheme. A number of additional guidance documents then provide further assistance on the various practical steps and considerations, as listed below:DescriptionGuidance notesPreliminary work around feasibility prior to implementing a flex schemeFeasibility study for a flexible benefits schemeEmployee car or company car, matters to considerOwn car v company carRules applicable for valuing benefits when employee has the choice between cash or a benefit in kind, including exceptions to the rulesOptional remuneration arrangementsWhat are the potential areas of salary sacrifice and the risk factors?Salary sacrifice arrangements ― overviewInteraction between salary sacrifice and national living or minimum wageSalary sacrifice and national minimum wageWhen and how often may an employee change a salary sacrifice agreement?Changing the terms of a salary sacrifice agreementInteraction between salary sacrifice
Redundancy ― an introduction
Redundancy ― an introductionRedundancy is a dismissal that occurs because the employer’s business, or its requirements for a particular type of work, ceases either generally or in the specific location where the employee works. The reason for the dismissal is effectively unrelated to the individual’s performance but is the result of commercial decision-making by the employer or some specific economic circumstances that an employer faces.Redundancies entitle employees to various statutory rights and, in the case of collective redundancies, involve rigorous requirements for consultation with the work force. This means that redundancies have the potential to expose the employer to liability stemming from successful employee challenges and claims. Careful planning for and structuring of a redundancy process is therefore required. This note provides a brief introduction to redundancy. The supporting guidance notes in this sub-topic provide further guidance on the specific important aspects of the redundancy process.The law to be considered depends on whether the redundancy arises as part of a collective redundancy situation or is simply an individual redundancy.Individual redundancy ― definitionRedundancy is dismissal that is wholly or mainly attributable to either:•the fact that the employer has ceased or is going to cease carrying on the business for the purposes of which the employee is employed, either altogether or in the place where the employee was so employed•the fact that the requirements of the business for employees to carry out work of a particular kind or to carry on such work at the place where the employee
Suggestion schemes
Suggestion schemesAn employee may be encouraged to share ideas with their employer that might benefit the business. These ideas may be posted in a staff suggestion box, posted on the company intranet or any other suitable method of delivery as agreed with the employer. Any payment made by an employer in recognition of the employee’s idea would ordinarily be taxable. However, a specific tax exemption exists for suggestion awards, subject to certain conditions.What constitutes a tax exempt suggestion scheme?Awards made by an employer to an employee are exempt from income tax, provided that all the following conditions are met:•the employer formally adopts a suggestion scheme that is open to all employees in general on equal terms or to a particular group of them. A scheme which is open to all the employees in a particular workplace or geographical area satisfies this condition•the suggestion relates to the activities carried on by the employer•the employee could not reasonably have been expected to put forward the suggestion in the course of their employment duties, taking account of their experience in the employment and their job description•the suggestion must not be put forward at a meeting held for the purpose of hearing employee suggestionsITEPA 2003, s 321The suggestion must be outside the scope of an employee’s normal duties. Many employee suggestions are made as a result of an employee coming up with an idea about something they know about as a result of their job. But where they would
Directors
DirectorsMost of the rules concerning tax on employment income and National Insurance apply to company directors in exactly the same way as they do to general employees. Unless otherwise stated, when the guidance notes in this module talk about 'employees' this includes both directors and employees.The rules on the national minimum wage (NMW) / national living wage (NLW) do not apply to company directors unless they provide work or services to the company under a contract of employment (see the National minimum wage ― overview guidance note).This guidance note is concerned with the instances where special tax or NIC rules apply to directors.Income taxWho counts as a director?Although in many cases it is obvious that an individual is a director, eg because their job title says that they are, there is a definition in the legislation on employment benefits that includes a range of people who may not normally be described as directors. It specifically includes anyone who manages the affairs of a company alone, is a member of a board of directors or similar body which does so, or is a member of a company whose affairs are managed by its members. If the directors (as described above) usually act under the direction or instruction of another individual in managing the affairs of the company, that other individual also comes within the definition of director for the purposes of the benefits code. Such an individual is sometimes known as a 'shadow director' but for the purposes of the
Salary sacrifice arrangements and non-cash benefits during maternity leave
Salary sacrifice arrangements and non-cash benefits during maternity leaveThe Maternity and Parental Leave Regulations are designed to ensure that a woman on additional maternity leave is entitled to the same level of benefits she would have received whilst on ordinary maternity leave.Outline of the regulationsThe main impact of the regulations is that when an employee who has been provided with non-cash benefits, such as a company car, goes on maternity leave, her employer could be considered to be sexually discriminating against that employee if those benefits are withdrawn or postponed.Following the Employment Appeal Tribunal ruling in the Peninsula Business Services Ltd case, the position for childcare vouchers (CCV) offered under salary sacrifice differs from that relating to other non-cash benefits to the extent that the vouchers are to be considered as cash benefits rather than benefits in kind. This brings CCV in line with pension contributions. This distinction is important because the requirement to provide pension contributions during maternity leave is restricted to periods of paid maternity leave, ie when the employee is in receipt of maternity pay. Where the employee receives Statutory Maternity Pay (SMP) only, pension contributions will only be payable for the first 39 weeks of maternity leave even if the employee takes the full 52 weeks leave available.This guidance note concentrates on cycle to work (CTW) arrangements as it is this type of arrangement that is likely to be impacted the most (being the most common salary sacrifice arrangement after pensions and CCVs), but the
National minimum wage ― overview
National minimum wage ― overviewStatute provides that almost all adult workers should be paid at a minimum hourly rate ― either the national living wage (NLW) or the national minimum wage (NMW) (according to the age of the worker and whether they are an apprentice). Unless otherwise stated, all references to the NMW in this guidance note should be read as including the NLW. EligibilityMost workers who work in the UK are entitled to be paid the minimum wage. This is a very broad category of people and includes all those who personally provide work or services under a contract, except for those who are self-employed and in specified excepted groups including:Office holders (unless the terms of their contract specifically make them workers)NMWA 1998, s 54(3)Serving members of the armed forces, including reservistsNMWA 1998, s 37Share fishermen who do not receive wagesNMWA 1998, s 43Voluntary workers employed by a charity or voluntary organisation who do not receive expenses or benefits other than subsistence or accommodation. Do note that volunteers receiving other benefits or expenses, eg use of cars or travel allowances, are not in this categoryNMWA 1998, s 44Prisoners or those detained in removal centresNMWA 1998, ss 45, 45BThose providing unpaid work in order to discharge a fineNMWA 1998, s 45AResident members of religious and other similar communities that are charitiesNMWA 1998, s 44AThose participating in government-funded training schemesSI 2015/621, reg 51Those participating in trial periods of work under a partly or
Feasibility study for a flexible benefits scheme
Feasibility study for a flexible benefits schemeTo consider setting up a flexible benefits scheme (see the Flexible benefits schemes ― an overview guidance note), it is important that employers are both aware of the consequences of the scheme and have checked that the relevant systems are in place.Many employers simply consider flexible benefits schemes to be a straightforward method for delivering employer’s National Insurance savings through salary sacrifice (see the Salary sacrifice arrangements ― overview guidance note) but the reality is that in most cases, full prior consideration should be given to the consequences of the scheme. The most appropriate method is to undertake a feasibility study.Flexible benefits v voluntary benefitsA flexible benefits scheme can cover benefits provided by salary sacrifice or benefits made available to employees to purchase from their net pay by taking advantage of their employer’s purchasing power (known as ‘voluntary benefits’) or a combination of the two. Consideration must be given to the basis on which the benefits will be provided and therefore the tax / NIC consequences of either approach.Voluntary benefits are generally those where salary sacrifice is not necessarily the most appropriate, eg benefits to which employees do not wish to be tied in for a minimum period. There are few tax / NIC considerations applicable and as long as the employer requires the employee to make good (ie repay) the tax cost to their employer of providing the benefit, there is no tax or NIC liability.Tax considerationsClearly, the first point to consider
Childcare and workplace nurseries
Childcare and workplace nurseriesIntroductionA number of employers will provide workplace nursery facilities for their employees. The provision of childcare benefits affords some potentially large tax savings as it allows all or part of the childcare costs to be funded by the employer free of income tax and NIC. Broadly speaking, the legislation covers two forms of exemption: childcare provided at the workplace and other childcare.The various exemptions are found at ITEPA 2003, s 318 onwards.From 6 April 2017, there have been significant changes to the operation of tax efficient childcare. While many of the historic arrangements continue, there are transitional arrangements for childcare vouchers which will close to new entrants on 4 October 2018. It is worth noting that the administration of many of the tax efficient schemes will be through public agencies rather than through employers.Workplace nurseriesWhere specific criteria are met, the provision of workplace nursery facilities are exempt from tax, NIC and reporting requirements. If these criteria are not met, then a taxable benefit may arise. The requirements for the exemption are found at ITEPA 2003, s 318 and relate to:•the child•the premises on which care is provided and the registration requirements•the person or persons who make the premises available•the extent to which the care is available to the employer’s employeesThe child must either be:•a child or stepchild of the employee, maintained at the employee’s expense•living with the employee•under the parental responsibility of the employee (ie have the same legal
Tips and commission
Tips and commissionIntroductionTips and commission are both varieties of payment that employees may receive in addition to their regular wage or salary payments. Tips, in particular, are often paid by a customer or client rather than by the employer. This note also covers the position regarding the distribution to employees of service charges applied directly to customers’ bills.The starting point is that both tips and commission, however paid, are taxable as earnings in the hands of the employee. In the case of tips, there are a number of ways in which they can be paid and a number of routes they can take before ending up in the hands of the employee. It is the handling of the payments before they reach the employee that determines whether the payments are also subject to NIC, whether they are subject to PAYE and, if so, who should operate PAYE in respect of the payments. Tips and commission paid in vouchers rather than cash are still taxable as earnings. See also Simon’s Taxes E4.470, E4.1112 and E8.232. HMRC guidance is at EIM00520 and NIM02900CO.TipsAs mentioned above, there are a variety of ways in which tips may be handled and an employee may receive tips by a number of routes in the same employment. The tax and NIC treatment will depend on the method of handling.As there are different treatments depending on how the tips are handled, methods for ensuring that staff receive the highest take-home amount have been devised. Troncs are a
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