Employers Tax Update: Spring 2023

The past year has been characterised by strong upward pressure on salary levels, driven by high inflation and a shortage of candidates. When considering overall packages, there are various benefits and incentives that can be offered to help recruit and retain people.

Staff pensions – are you getting it right?

One area of considerable confusion and risk for employers is the company pension scheme, with many paying more tax than they might if their arrangements were fully understood.

There are three types of arrangement, all dealt with differently and with unhelpfully confusing names! They are:

1. Net pay arrangement – the employer makes their contribution without any deductions, and the employee’s contribution is made after deduction of national insurance but not income tax. The result is that the full amount deducted from the employee is paid directly to the pension scheme together with the employer’s contribution.
2. Relief at source – the employer makes their contribution without any deductions, and the employee’s contribution is made after deduction of national insurance and income tax. Typically the employee’s contribution is 20% lower as the pension scheme provider is able to ‘top up’ the employee’s contributions with a 20% tax credit claimed from HMRC. However, the employee does not get tax relief for the contribution hence their take home pay is no higher. If the employee is a higher-rate taxpayer they will need to claim additional tax relief on their pension contributions directly from HMRC.
3. Salary sacrifice – the employee can opt to have their salary reduced by an amount equal to what they contribute to their pension. The employer’s contribution is then increased by the same amount. The result is that contributions are made with full relief from income tax and national insurance.

Salary sacrifice is the best choice from a tax efficiency perspective, however it is administratively more complex and can reduce the amount that an employee can obtain a mortgage for. It can also have an unintended effect on maternity pay calculations.

Praxis’ payroll team frequently inherit pension arrangements from other advisers that are being incorrectly calculated or in some cases where employees are missing out on tax relief that they are entitled to. If you are unsure what pension arrangements you have, or could have, please contact us.

Electric car leasing – a no-brainer?

In 2020 the government offered a huge incentive for employees to be provided with electric cars by setting the annual tax value to nil in 2020/21 and just 1% of the list price of the car in 2021/22. From 6 April 2022 the amount is 2% and this continues through to 5 April 2025.

What many employers are not aware of is that HMRC also exempted electric cars from further tax charges under the so-called OpRA rules (essentially the new name for “salary sacrifice”), where an employee’s salary is reduced in return for providing them with an electric car.

Under the rules for electric cars if the employer leases a car for the employee for £400 per month and reduces their salary by the same amount, then the tax cost to the employee and the national insurance cost to the employer is calculated on 2% of the list price of the car. If the list price is £30,000 and the employee pays higher rate tax then the annual tax cost to the employee could be as low as £240. However, in this example the employee is saving £160 a month in tax and national insurance on their reduced salary. There would also be a small employer’s national insurance saving on top.

There are a number of leasing platforms available to offer a wide range of electric vehicles to your employees via payroll at no cost to the employer and with substantial tax savings to the employee.

Petrol cars – still worth it?

Contrast the above example with the OpRA rules for non-electric cars under salary sacrifice where the taxable benefit is based on the higher of the calculated benefit for the car, at a rate of between 5% and 37% of the list price, or the amount deducted from salary. This results in either no tax saving at all or a punitive tax charge for the most polluting vehicles.

In the alternative situation of an employer offering a vehicle to employee as part of their package, particularly where travel is part of the role, then the OpRA rules will not apply if no deduction is made from salary for the car. In this case there could still be merit in providing a plug-in hybrid so long as it emits less than 51 g/km as the taxable benefit would be calculated off 2% to 14% of the list price, battery range-dependent.

Workplace nursery schemes

In 2022 we saw a number of employers join workplace nursery schemes which allow the employer to provide a nursery place to the employee for their child at a nursery of the employee’s choosing, in return for which the employer reduces the employee’s salary by the cost of providing the place.

Scheme providers claim that these arrangements are exempt from tax and national insurance as a benefit in kind if they can fall within an exemption established in 2003, which was clearly intended for on-site workplace nurseries. Given full time nursery places in London can cost over £2,000 per month, the tax reduction for the employee can be £10,000 per annum.

HMRC, perhaps unsurprisingly, are unhappy with this development and have published their position stating that the ‘exemption was not intended to apply and in the opinion of HMRC does not apply to commercially marketed schemes of the kind described…. where the employer really does no more than to buy in places at a commercially run nursery.’

Our view is that employers should avoid involving themselves in these schemes without first obtaining tax and employment law advice.

Meals provided

One benefit many of our clients seem keen on is the regular or occasional provision of meals for employees. There is a ‘workplace canteen’ exemption from what would otherwise be a taxable benefit that, with care, employers may be able to take advantage of. Interestingly the exemption does not require food to be cooked on the premises, and so bringing meals in for employees to enjoy together is possible subject to certain tests.

There are pitfalls – the most significant one being that meals must be available to all employees at a given site, not just people of a particular job role, seniority etc.