The NIC exemption for holiday pay schemes is being removed. But there’s other options to structure pay tax efficiently, says Anil Patel.
The withdrawal of the national insurance contribution (NIC) exemption in relation to holiday pay schemes for businesses in the construction industry will take effect from 30 October. These centrally managed schemes were set up for itinerant workers who did not stay very long with an employer. Although they may still operate after 30 October, NIC costs will increase for both employers and employees currently taking advantage of the scheme.
Holiday schemes have been exempt from NIC since 1979. Given that employee NIC rates are now 12% for earnings between the primary threshold and the upper earnings limit (and 2% thereafter), and that employer NIC rates are 13.8%, the financial impact of the scheme’s withdrawal is likely to be keenly felt.
There are, however, a number of other tax efficient ways to structure remuneration costs, the most popular of which is the provision of benefits via a salary exchange arrangement.
Under a salary exchange arrangement, or salary sacrifice as it is often called, employees will typically exchange a part of their salary/wages in return for a tax/NIC efficient benefit. One of the most popular within the construction sector is the implementation of salary exchange in relation to daily scale rate subsistence payments. The arrangements are agreed with HM Revenue & Customs which provides employers and employees with certainty that the arrangements will not be challenged.
An employer that has 200 site-based employees can, potentially, realise NIC savings of approximately £120,000 a year while a site-based employee’s net pay could rise by as much as £600 a year.
A detailed review of the workforce is required at the outset to identify those individuals who can participate in such an arrangement. It is also necessary to put in place appropriate procedures to monitor the arrangement, because implementing an arrangement correctly but not subsequently managing it correctly could be costly.
In addition to the changes to the holiday pay scheme, employers need to consider the impact of the forthcoming pension reform, set to take effect on a staged basis from 1 October. Under these new provisions all employees (as well as other types of workers) will be automatically enrolled into pension schemes. One approach to mitigating the additional costs is to convert employee pension contributions into employer contributions via salary exchange.
There are many other benefits which can be provided cost effectively when coupled with salary exchange. For example, parking at or near the place of work, childcare vouchers, professional subscriptions and discounts from high street retailers, all offer opportunities to improve the net pay of employees without increasing gross pay, and can also reduce costs for employers.
Many employers are progressively offering these options to their employees via flexible benefits arrangements, which has the added value of empowering the employee to choose which benefits best suit their specific needs or lifestyle.
Traditionally, lack of access to office-based computers by construction employees means that flexible benefits platforms have been of limited interest. However, given that most platforms can now be accessed via the web and that most workers are likely to have access to the internet via their smart phones, it may be worth employers exploring such reward structures to assist with employee retention and the delivery of a tax-effective and creative reward package.
Anil Patel is associate director, employment tax, at Grant Thornton, tel: 020 7728 3366; email: anil.patel@uk.gt.com
