First of all, as the subject line suggests, let’s dispel the myth that only high earners need support with taxation issues. Anyone earning an income will benefit from understanding the most tax-effective way to manage their money. And those who are married or in a civil partnership can often benefit even more by understanding how best to jointly arrange their financial affairs. For employers offering workplace financial wellbeing support, helping employees understand the relevant aspects of tax should play a central role.
Even when just considering the salary, pension and benefits you provide, there are a myriad of taxation issues involved – and understanding the tax implications, reliefs and benefits can have a significant impact on employee appreciation and engagement. Tax relief on pension contributions? Excellent. Additional savings by using salary sacrifice? Even better. Understanding that the tax charge for their private medical insurance is but a tiny fraction of the cost of providing this valuable benefit? You get the picture.
Of course, the best results are achieved when financial wellbeing is approached holistically. So it makes sense for any financial education support you offer to cover broader topics than just those directly related to what you provide in the workplace.
For example, for low earners, part-time employees and those on zero-hour contracts, understanding what support they might be entitled to from the state, and how their income interacts with state benefits, can be invaluable. Even simply highlighting where and how people can obtain further information on this type of thing can be a great start.
We all know that a significant proportion of the UK population lacks financial resilience, and money worries are rife. Recent press coverage included the particularly shocking statistic that one in five calls to the Samaritans are due to extreme financial distress. And financial stress can hit anyone, regardless of income. So anything employers can do to help alleviate some of this pressure can only be a good thing – both for your employees and your business.
As with all aspects of your workplace wellbeing programme, exactly what type and level of support to offer will vary greatly depending on your workforce and circumstances. Taxation, like many financial matters, is one of those more complex issues where face-to-face support can be particularly valuable. Where budget and logistics allow, then workplace seminars, ‘lunch & learn’ sessions or drop-in clinics can deliver excellent results – particularly if there is also the option for employees to have a quick one-to-one where they can ask questions in confidence. If face-to-face support isn’t practical, then consider alternatives such as videos, online tools, nudges, telephone helplines and clear signposting to where employees can access further information.
What should workplace tax guidance cover?
I’ve highlighted below just some of the key areas where information and education on tax can be particularly helpful:
1. Workplace pensions
An obvious, but crucial one – a pension plan is, after all, simply a tax-advantaged saving scheme. Many people don’t appreciate this and put pensions in the ‘too complicated’ box. The combination of tax relief and employer contributions make a huge difference to the affordability of long-term saving, and enable employees to save a meaningful amount for their retirement.
For lower earners, part-time or flexible workers, the disparity on how tax relief is applied to employee contributions across different types of pension scheme can also be an important issue to cover. If your scheme uses the ‘relief at source’ method (where an employee’s net contribution is deducted from their net salary and then basic rate tax relief is added automatically by the scheme provider), then all employees benefit from a 20% uplift on their contributions – regardless of how much income tax, if any, they have paid. This is a huge benefit. On the other hand, if you operate an occupational scheme that uses the ‘net pay’ method (where an employee’s gross contribution is deducted from their gross salary), employees will only receive relief on tax they would actually have paid.
2. Salary sacrifice or SMART (save more and reduce tax) contributions
The National Insurance Contribution (NIC) savings available through salary sacrifice can be significant – particularly for ‘middle earners’ where most or all of their sacrifice falls into the 12% NIC band. See my recent REBA article, how to make the most of salary sacrifice for you and your employees, for more information on this particular topic.
3. Private medical insurance and other chargeable benefits
If you provide benefits that are subject to employee tax charges, whether through flex or standalone, then also provide clear, educational communications explaining the cost/value/benefit. Yes, you’ve paid £XX more tax, but you’ve received a benefit worth £XXXs in return!
4. Child benefit – and the ‘high income child benefit tax charge’
When compared with the typical definition of a ‘high earner’, there is a much lower threshold for the ‘high income’ test for child benefit. If one parent earns at least £50,000 a year, your child benefit is gradually tapered away. Once earnings hit £60,000 a year, you no longer receive any child benefit. Even those who are not impacted due to earnings, may well benefit from simple prompts reminding them how, where and when to claim.
5. Individual savings accounts (ISAs)
Whether or not you offer a workplace ISA option, most UK taxpayers can benefit from saving in an ISA. All adult UK residents can save up to £20,000 into an ISA each year, and benefit from tax-free interest or tax-favoured growth on their investments.
6. Lifetime allowance (LTA) protections
Employees at or near the LTA, who have a ‘protected lifetime allowance’, need to be very careful not to be inadvertently enrolled into a workplace pension or registered group life scheme, as this can void their protection, leading to a costly tax charge.
7. High-earner issues
Some may consider these ‘nice problems to have’, but the higher your income, the more tax issues there are to consider. Two of the most obvious are the reduction in personal allowance for income over £100,000 a year, and the tapered annual allowance for pensions once income hits £150,000 a year. Providing these key employees with targeted support to help navigate their options and avoid unintended tax consequences can help you ensure your reward package has maximum benefit at all levels.
This article was first published with REBA on 5 November 2019.