How employers can cheer up staff with tax incentives

The excitement that is associated with the holiday season in December each year quickly fades away as the demands of the New Year sink in for a large proportion of the population.

This is mostly due to the spending frenzy that is associated with the festive season with most people disregarding the old and generally accepted principles of financial planning.

The Covid-19 pandemic has no doubt presented challenges to employers and employees alike in 2020. Disruptions in the supply chain, depressed markets among other major challenges, have been the norm in the year. This may thus limit the extent to which some employers can reward or appreciate their employees without breaking the bank.

There are, however, several tax-efficient ways that employers can adopt to incentivise their employees in the New Year while at the same time ensuring that their commercial operations remain viable in the long term.

For instance, medical services or medical insurance provided by an insurance provider approved by the Commissioner of Insurance which is paid by an employer on behalf of a full-time employee and his/her beneficiaries is not taxable on the employees.

On the other hand, the employer is allowed to deduct the associated expenses in determining their taxable income. This benefit indirectly results in increased productivity since employees devote their time to their employees with very minimal lost time due to untreated sickness.

Remuneration is one of the main determinants of the attractiveness of an employer to prospective employees.

Notably, employees can be remunerated through a mix of cash and non-cash benefits. These benefits are subject to income tax in the hands of the employees in the form of Pay As You Earn (PAYE).

The law, however, provides that non-cash benefits up to a maximum of Sh30,000 per annum are exempt from PAYE and hence constitute tax-free benefits to the employees. Employers can therefore device a remuneration package that includes some benefits in kind to shield employees from some tax cost.

Employees constantly seek ways of improving their general welfare through borrowing and investing by using their payslips as a form of security. This is normally through financial institutions and other credit organisations.

Employers can also play a role by providing their employees with low or interest-free loans. This does not result in a taxable benefit on the employee. The associated benefit is borne by the employer in form of fringe benefit tax.

The constant changes to the global landscape with rapid digitalisation being the norm require employees to keep abreast of industry changes. This requires continuous learning and development to ensure that the organizations remain relevant amidst the changes.

Employers can provide customised trainings to their employees which could be offered by internal human capital resources or outsourced to subject matter experts. This form of training does not constitute a taxable benefit on the employees.

The welfare of employees in terms of their meals can have a major influence on their productivity and the state of their minds.

The safety of the food that is consumed by employees can also influence their health with employees who consume food from unhygienic places often falling sick.

Employers can provide meals in a canteen or cafeteria operated or established by the employer or a third party who is a registered taxpayer for the benefit of employees subject to an annual limit of Sh48,000 per employee.

This does not constitute a taxable benefit on the employees while the associated costs are deductible by the employers in determining their taxable income.

Old-age poverty is a reality for many employees who do not put in place appropriate plans and measures to safeguard their future.

Pension remains a key safety net for many retirees and thus a critical consideration for employees. Employers can make pension contributions to a pension, provident or individual retirement schemes for their employees.

This does not constitute a taxable benefit on the employees subject to the maximum set limit and conditions that are set out for employers who are exempt from income tax.

These among others provide tax-efficient ways that employers can adopt to reward their employees in the new year while at the same time giving their businesses impetus as employees devote their energy and time to deliver results amidst the challenges.

Mr Maina is a Senior Tax Manager at Ernst & Young LLP (EY). He is reachable via [email protected]. The views expressed herein are not necessarily those of EY.