NEAL SMITH from KPMG’s people services team in East Anglia looks at why companies should be reviewing their biggest business cost - pay

AS THE economy remains fragile, businesses are facing staff-related issues such as pensions, the 50% Income Tax rate and the 1% rise in National Insurance Contributions (NIC) which came in to effect from April.

In order to increase headcount, without damaging their bottom line severely, there needs to be careful consideration as to how to reward staff in the most tax-effective way.

People costs to a business can be one of the biggest outlays that a company has, and the way in which your reward your staff can be a powerful tool in retaining and developing talent within your organisation.

However, there is much that can be done to ensure that companies have the right remuneration schemes in place to ensure they have the right staff with the right motivation to drive the business forward.

Capital Gains Tax (CGT) at 28% makes share-based rewards attractive in the right circumstances, while salary sacrifice schemes can reduce NIC for employee and employer alike. Reducing risk around employment tax compliance and, more importantly, finding ways of making sure they can recruit, reward and retain the right people in a tax-efficient way can have an important impact on the company’s bottom line and, in turn, its ability to grow.

In the current environment, organisations must carefully review their employee reward strategy to maximise tax efficiencies while maintaining compliance. At the same time it is essential that the reward strategy supports your business plan. Since the introduction of the NIC rate increase in April there has been an increased appetite for conservative planning around variable compensation, with employers wishing to avoid an aggressive stance but looking to mitigate the impact of tax and NIC changes.

To mitigate the impact of these changes, employers are increasingly turning to tax efficient share-based payment arrangements, which enable employees to receive future payouts in a form taxable as capital gains at 28% (as opposed to Income Tax at 40% or 50%) and outside the scope of National Insurance. Others are looking at delivery of tax efficient benefits through flex arrangements. Additionally, some employers are offering employee share awards under such arrangements or non-cash benefits, to mitigate the impact of the loss of their Personal Allowance.

Employers that choose to review their people costs, not only reduce the risk of compliance failures, but will increase employee engagement through effective reward. As a result, they will be able to retain the highest calibre of employees and position themselves best for a recovering market.