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Everyone knows it’s a tough environment at the moment and, for many employees, pay rises have stalled as companies seek to control costs. Getting the best value from benefits is therefore an increasingly important area to focus on.
The range of employee benefits being delivered by employers has remained relatively static over the past few years. This is partly driven by the tax rules that underpin many of the benefits offered, which have become increasingly complicated over the last few years. For example, 2011 saw a change to the way that childcare voucher schemes — now one of the most common new benefits — operate. Plus there was also a revision to the VAT treatment of salary sacrifice benefits, which impacted the cycle to work scheme. Pensions have been subjected to a barrage of change over the past few years and there is no sign of this abating as the pension reforms start to bite this October.
In such an environment, making sure that employees get a good understanding of their benefits and how they fit in with their wider financial position is often a struggle for employers. Particularly as it involves sacrificing salary at a time when pay rises are in short supply. So drawing up a clear plan that communicates their financial advantages is essential.
Empowering employees by helping them to understand what is on offer will help improve the perception of value and support of the investment being made by employers into benefit packages. There are a number of ways to do this, but group sessions that span the whole benefits offering will almost always be better received that communicating through benefit booklets and product specific information alone.
Of course, every employer is different and will need to make sure that their offering suits their employee profile and their own requirements as a business. But giving employees extra choice and more support can help perk up existing offerings at low or no cost - and with little risk.
For example, employers have been able to provide company funded mobile phones for employees without creating a tax liability for some time and these can now be used on a salary sacrifice basis to provide tax and national insurance (NI) savings to both the employer and employee. Specialist providers deliver split billing to control the risk of costs outside agreed tariffs and also to cover certain aspects of risk through insurance, like the employee leaving quickly before an employer can recover the outstanding liability through final pay. While not completely without risk — let’s face it, little is — this is a good opportunity to help employees save money with no cost to the employer.
Pension salary sacrifice is another benefit simple to implement. And it is surprising that there are still many employers yet to implement it. This offers an excellent way of delivering better value to employees, while offering the prospect of significant NI savings for the employer. These can either be used to enhance the pension plan, reinvested to provide other benefits or retained by the business. With good advice and systems, the process can be implemented and tracked with little risk and, while it will not be right for every employee, it does make sense to consider it if you have not already done so.
Whether refreshing existing benefits or implementing new ones, one of the biggest reasons for employers not making full use of a benefits programme is perceived complexities in implementation. And while employers do need to think carefully about how their employee benefits package makes best use of the tax system and that their compliance and record keeping requirements are met, technological improvements in delivering benefit programmes do make the task easier. Plus, a good benefits provider will be able to ensure packages are legally and tax compliant.
So when good news can be a bit thin on the ground, it’s an opportunity for employers to present something positive.
Richard Stewart is head of Mazars Employee Benefits. For more information on employee benefits please contact email@example.com
Most modern employee benefit plans allow employees to swap some of their existing benefits or purchase new benefits from a menu of options. Payments in excess of the employees spending allowance are normally collected via a gross salary adjustment. If employees exchange salary for tax-exempt benefits such as pensions, life cover, childcare vouchers, or mobile phones they do not pay tax or national insurance (NI) on the amount exchanged, subject to certain limits. Plus, employers do not pay NI on payments to exempt benefits. The next three steps explain how.
If employees exchange salary for tax-exempt benefits they do not pay tax or NI on the amount exchanged, subject to certain limits. This gives a basic rate taxpayer earning less than the NI Upper Earnings Limit (UEL) a saving of 32 per cent compared to receiving the money as salary (based on 2011/12 NI rates). For example, an employee that exchanges £200 per month of their salary for childcare vouchers and additional pension payments will save £768 per annum in tax and NI compared to taking the money as salary. Even if the benefits are not tax-exempt, employees can still exchange salary for employer provided benefits and, while they will be charged income tax, they save NI as their salaries have been reduced by the value of the benefit. This gives employees earning under the UEL a 12 per cent saving.
Employers do not pay NI on payments to exempt benefits. If these payments have been exchanged from salary by employees, then the employer will save 13.8 per cent employer’s NI on the amounts. For example, an employee that exchanges £200 per month of their salary for childcare vouchers and additional pension payments will deliver an annual NI saving to the employer of £331.20.
Any change to, or implementation of new employee benefit plans need to be carefully considered. A new benefits package can mean changes to employees' employment contracts and salaries. HMRC may look closely at all benefit arrangements as income tax and NI levels may be reduced so it is important to ensure these are both implemented and operated correctly and records kept. The interaction of income tax, NI and benefits for employees can create a complex situation and the ability to communicate, administer and simplify a modern benefits plan are key to the success of a plan.