How to incentivise your employees

It is no secret that people like to feel rewarded for a job well done. Whether it’s a simple ‘thank you’ or a bonus, evidence shows there are benefits of rewarding employees for hard work.

A poll of over 2000 workers which was carried out by the Reward and Employee Benefits Association revealed that 82% felt motivated after receiving some form of recognition.

Nicola Roby, director at CHW Bolton Accountants explains further and highlights that, as an employer there are certain tax obligations to take into account when giving cash or non-cash rewards.

Cash bonuses

If you’ve had a successful year, you may feel your employees deserve a cash bonus. It can be a strong motivator, as it draws a direct connection between the company’s performance and that of its employees and can encourage loyalty.

It’s also a popular choice of reward – figures from the Office for National Statistics show that a record £46.4 billion was paid in bonuses in 2016/17.

Cash bonuses are treated as earnings, in exactly the same way as regular pay, so income tax and class 1 national insurance contributions (NICs) will need to be deducted through payroll.

However, rewards other than cash can be just as effective at making employees feel valued for their work and can often carry lower costs for the employer.

There are different rules for how different types of bonus are taxed. Here are just some examples:

Medical insurance

If you’re arranging and paying for the insurance directly on behalf of an employee, you’ll need to pay class 1A NICs at 13.8% on the taxable value.

Some items are exempt from tax:

  • 1 medical check per tax year
  • eye tests, glasses or contact lenses if the employee uses a monitor or screen at work
  • medical treatment outside the UK, for employees working overseas
  • treatment or insurance that covers work-related injuries or diseases only
  • medical treatment up to £500 as part of a return to work plan

Childcare

Workplace nurseries are exempt from tax, but they must meet certain registrations and approvals, and be available to all employees.

You can also provide childcare vouchers tax-free within certain limits. For employees who joined your childcare scheme before 6 April 2011, the limit is £55 per week or £243 per month. Those who joined on or after this date will have different limits, based on their rate of income tax.

From March 2018, more employees are now able to able to make use of HMRC’s tax-free childcare scheme, as it will open for children over 6 years old. You cannot provide childcare vouchers to employees using this scheme though.

Company cars

Company cars have long been used by businesses to reward and retain staff as an extra perk on top of a standard salary. Company cars are taxed according to their list price and emissions. Those with high emissions are taxed more heavily so it can make sense to choose a cheaper, low emission models.

Tax free rewards

Certain rewards can be provided tax-free, within certain conditions. Some examples include:

  • pension contributions, provided total contributions don’t exceed the employee’s annual allowance
  • parking spaces located at or near the workplace
  • a bicycle and safety gear can if the main use is travelling to work, but the employer must retain ownership
  • 1 mobile phone can be provided but the employer must retain ownership and contract with the telecoms provider
  • meals and refreshments although these must be available to all employees in a staff canteen.

For more information about rewarding your employees or for any other issue related to your small business contact Nicola Roby at CHW Bolton Accountants on 01204 534031 or via our contact us page.


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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