How to attract, retain and reward your team tax-efficiently

In the first part of our blog series, we challenged the common assumption that setting up a limited company is always the most tax-efficient option. But as a business grows, the focus often shifts from simply managing tax to thinking about how to attract, retain and reward the people who help make the business successful.

A competitive salary is important, but it is no longer the whole package. Businesses can offer a range of additional benefits and incentives that can make a real difference to employees – and some can be provided in a tax-efficient way.

Look beyond the payslip

When it comes to attracting and retaining good people, businesses need to think about the overall employee experience, not just basic salary. Depending on the business and its employees, this could include pension contributions, flexible benefits, healthcare, wellbeing support, workplace perks or opportunities to share in the success of the business.

The right package can help employers stand out in a competitive recruitment market while giving existing employees more reasons to stay.

Share schemes can help employees share in success

For companies, share schemes can be an effective way of aligning employees with the long-term success of the business. There are a number of different schemes available, with different eligibility requirements and tax treatments. For example, qualifying companies may be able to use schemes such as Enterprise Management Incentives (EMI) to give key employees an opportunity to benefit from future growth in the value of the company.

Share schemes can be particularly attractive for businesses looking to retain key employees over the longer term, as the potential benefit is linked to staying with and helping to grow the business. However, they can be complex, so it is important to take advice before putting a scheme in place.

Salary sacrifice and pension contributions

Salary sacrifice can also form part of a wider employee benefits package. It allows an employee to give up part of their salary in exchange for a non-cash benefit, subject to the relevant rules.

Pension contributions are one of the most common examples. An employer can make pension contributions on behalf of an employee, helping them build their retirement savings while potentially providing tax and National Insurance efficiencies for both the employer and employee.

Other benefits can also be provided through salary sacrifice arrangements, although the tax treatment varies depending on the benefit.

Don't overlook the small things

Not every employee benefit needs to be expensive or complicated. Trivial benefits can be a simple way to recognise and reward employees. Subject to certain conditions, employers can provide qualifying benefits worth £50 or less without the benefit being subject to Income Tax or National Insurance.

The benefit must not be cash or a cash voucher, cannot be provided as part of a salary sacrifice arrangement and must not be a reward for particular work or performance. There are additional rules for directors of close companies, so it is important to make sure the conditions are met.

Read our previous article on trivial benefits.

Workplace perks can make a difference

Some of the most valuable benefits aren't necessarily about putting more money into an employee's payslip. Staff parties, health screenings and employee assistance programmes can all contribute to a workplace where employees feel valued and supported. Depending on the benefit, there may also be specific tax exemptions or rules that make them an efficient part of an overall reward package.

The key is to look at what your employees actually value. A benefit that sounds impressive on paper won't necessarily have much impact if it isn't relevant to your team.

It's about the long term

Attracting someone to a business is one thing. Keeping them there is another. A well-designed reward package can help businesses compete for talent, recognise employees' contribution and encourage people to think about their future with the business.

And you don't need to be a large company to start thinking this way. Sole traders can employ staff and, subject to the relevant rules, can offer many of the same benefits and incentives as limited companies. Share schemes are the main exception, as these require a company structure.

The most effective approach is to consider the whole package - salary, benefits, pensions, incentives and workplace culture - rather than looking at tax efficiency in isolation. As your business grows, so should your approach to rewarding the people who help it succeed.

In our next blog, we'll look at another important question for growing businesses: what should you do with your profits?

In the meantime, if you're looking to attract, retain and reward your team, speak to Monahans about how we can help you build an effective and tax-efficient reward strategy.