Anyone who has received a bonus at work will recognise that sinking feeling that goes with seeing it whittled down by the taxman. But increasingly, companies are looking at means of rewarding their employees which save them from the worst ravages of the Revenue Commissioners.
A variety of flexible benefits have become popular in recent years from club memberships to tax-efficient share-ownership schemes. The latter are likely to become even more common as the trade union movement has identified profit-sharing as a way for workers to benefit from the fruits of growth without inflationary pay demands.
Such schemes make sense because they not only provide a tax efficient means of rewarding workers but are also useful from a human resources perspective. Giving employees a share in the enterprise they work for encourages commitment and motivation and in sectors where staff and skills shortages are emerging and it often discourages staff from going elsewhere for a higher salary.
Although senior executives have benefited from share options for years, it is only in recent times that ordinary employees have been offered a chance to obtain a stake in the company which employs them.
Approved profit-sharing schemes (APSS) are the main broad-based employee share incentive schemes in operation in the Republic at present with a tax advantage. These have increased dramatically in recent years, boosted by the privatisation process in many semi-state companies. In the tax year ending April 5th, 1994, just four schemes were approved by the Revenue but this had risen to 32 in the last tax year and the total number of such schemes now stands at 271. To date nearly 140,000 people benefited from such schemes, the Revenue estimates.
Profit-sharing schemes have proved very popular wherever they have been introduced because they allow employees to convert a cash bonus into shares in the company for which they work. Provided these shares are held for a period of at least three years, the employee is not liable to income tax although capital gains tax (CGT) must be paid when the shares are sold.
However, the reduction of CGT to 20 per cent from 40 per cent last year makes this very attractive for workers who pay tax at the marginal rate of 46 per cent.
Now the whole area of employee share ownership is set to receive a further boost following the inclusion of provisions in the Finance Bill for the setting up of Save As You Earn (SAYE) schemes.
These will allow workers to save a fixed amount - between £10 and £250 per month (€12.70-€317.43) - of their after-tax salary over three, five or seven years. At the end of this time, the accumulated savings - plus whatever interest has been earned in the meantime - can be used to purchase shares in the employer-company at a pre-determined price. The employer may offer the share options at a discount of up to 25 per cent of the market price at the time the option is granted.
The gain on any such shares will be free of income tax but will be subject to CGT once they are sold.
In addition to the tax advantage, SAYE schemes provide employees who are not entitled to bonuses, or whose bonuses are too small to buy a lot of shares, with an opportunity to acquire equity. In an era of low deposit rates, this will be an attractive means of saving for many although employees should be aware that investing in shares is never a one-way bet.
If the British statistics are anything to go by, SAYEs should prove popular here, says Mr Hugh Duggan, secretary of the Irish Profit Sharing Association, an affiliate of IBEC. There are now more than 1,500 SAYE schemes in Britain, nearly double the number of approved profit-sharing schemes, he says.
Already companies are responding to the new proposals. Mr Jim Ryan, director of personal taxation at Ernst & Young, says that within days of publication of the Finance Bill, five firms had approached his company with a view to establishing SAYEs.
To date, share-ownership schemes have proved most popular with publicly-quoted companies or Irish subsidiaries of plcs although there is nothing to stop private companies going down this route and a number have staff share schemes in place. The financial and technology sectors are also to the forefront in this area although other industries are slowly beginning to realise the benefits of introducing such schemes.
Meanwhile, there is a whole range of other fringe benefits being offered to employees aside from the more traditional pension and health insurance benefits. The tax treatment of such benefits usually decides their attractiveness and popularity. Company cars, for example, once common among senior employees, are increasingly being replaced with car and mileage allowances as the benefit-in-kind tax on them has increased. In addition, the Government has set up a working group to consider benefit-in-kind tax on car-parking spaces provided by employers which may discourage car usage.
But if favourable treatment of cars by the taxman is out, public transport is in. The Finance Bill included a "green" measure exempting employees provided with travel passes by their employers from benefit-in-kind tax where the passes are valid for a period of one month or longer.
Preferential loans, a common perk for employees of financial institutions, are not as attractive as they once were, given the low interest-rate environment.
But paying for an employee's gym or club membership is becoming more common. Not only does it encourage workers to stay healthy but it provides them with both a cash flow and tax advantage.
The Finance Bill has also allowed employees to avail of subsidised or free childcare facilities provided by their employers on their premises without incurring a tax liability.
Many companies pay telephone line rental for staff, offer them lunch subsidies or give them the opportunity to buy computers at a discount. Benefit-in-kind tax is payable on the discount or if the computer is gifted to the employee, the tax is payable only on the cost of the computer to the employer rather than its market value which is often higher.
