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Will Hutton

Will Hutton

Principal, Hertford College, Oxford University and chair of the Big Innovation Centre

Friday 16 Mar 2012
Are you paying more tax and NI than you need?

Are you paying more tax and NI than you need?

With the Government attempting to deal with debt reduction and taxes and social insurance costs rising on employments, employers are increasingly implementing schemes to reduce their tax liabilities.

Although measures to reduce tax primarily benefit employees, increasingly employers are looking at various means to remunerate their employees while reducing their costs.

Such measures include:

The use of tax and NICs efficient payments or benefits

Expanding employee share ownership through approved share savings schemes

The use of salary sacrifice arrangements, and

The use of workforce management to ensure that optimal hours are allocated across a workforce to minimise employer costs.

Employers are currently faced with the burden of paying 13.8 per cent in secondary National Insurance Contributions (NICs) for employees who earn over £7,488 per annum (that's £144 per week or £624 per month).

For every pound paid under these limits the employer on-costs are zero. For every pound paid over these limits, then the employer is charged an extra 13.8 pence. And with Pension Reform Auto-Enrolment coming along, there is potentially a further initial one pence addition rising over time to an extra three pence.

So what are the alternatives and what can employers do to minimise their costs and potentially benefit employees?

HMRC allows employers to pay £4 per week (or £18 per month) tax and NICs free where the employee undertakes on a regular basis some work from home (known as the guideline rate for home workers). Mileage rates for use of private vehicles can also be maximised to save business travel expenses' optimisation.

Smart Pensions are becoming widely used along with other salary sacrifice arrangements to facilitate provision of benefits in kind to employees and at the same time benefit from NIC savings. For example, for every £1,000 of employee pension contributions converted to a salary sacrifice employer contribution, the employee saves an extra £120, and the employer saves £138. The same principle applies to the provision of Child Care Vouchers.

Employers with many part-time workers can actively manage and allocate rostering and working arrangements to minimise the employees' NIC costs by maximising the hours of some part-time workers while restricting the hours of other part-time workers to reduce the secondary NIC impacts.

So, why isn't every business using these methods to reduce the tax burden on themselves and their employees? The simple answer is that to set-up and then administer these methods can be complex. Not all payroll or workforce management systems have these capabilities 'in the box'. Even if the technology has the abilities, the know-how required to define these schemes and then operate them can seem daunting. In these times of economic pressure and tough trading conditions,  more and more employers are tuning their systems to seek out and save every last penny. In some circumstances these savings can amount to ten's of millions of pounds savings per annum.

David Woodward, chief product and innovation officer, Ceridian UK