If you read nothing else, read this . . .
• Many employers are looking to tax-efficient perks to engage staff in straitened times.
• Employers must explain the savings potential of tax-efficient benefits to staff.
• Communication campaigns and year-round enrolment opportunities can boost take-up.
Case study: Efficient step for Foot Anstey
Plymouth-based law firm Foot Anstey launched a new benefits package in November 2010 with the aim of offering staff a wide range of benefits as efficiently as possible.
Jo Redgrave, head of HR, says: “It was important to be able to do it in a tax-efficient manner, both in saving costs for us and in demonstrating to our employees that we are trying to do the most effective thing for them.”
The firm now offers salary sacrifice pensions, the ability to buy and sell holiday and childcare vouchers, plus other perks that have a cost attached, and is now looking at healthcare packages.
Effective communication has been vital, says Redgrave. “We needed to invest a lot of time in explaining how salary sacrifice works and showing how reducing employees’ salary means they get more net pay,” she says. “We produced written materials and group presentations and staff also had the opportunity to talk one to one.”
Results so far have been encouraging. “We have had some really positive feedback,” says Redgrave. “People have said it’s a bit different and it feels like we are taking care of them.”
Tax-efficient savings for employers and staff are a big attraction of voluntary benefits, says Nick Martindale
With the UK economy still fragile and pay rises limited, many employers are looking to tax-efficient benefits to help engage employees and generate extra savings for the business.
Cheshire West and Chester Council is one example. Debbie Thompson, reward manager, says: “It would be great to have lots of money to spend on staff benefits, but we don’t, so the best thing we can do is look at efficient ways to offer benefits to staff. In the longer term, it means there is money coming back to the authority which we can reinvest into more benefits going forward.”
To take full advantage of the tax-efficient benefits that exist, employers must explain the potential savings to staff and market schemes effectively. Neil Strong, strategic consultant at Shilling Communication, says: “A flurry of activity in the week leading up to an enrolment period isn’t enough. Employees need time to understand the scheme and to appreciate what benefits are on offer.”
Salary sacrifice is a well established method for employees to save on tax and national insurance (NI) contributions. Employers provide a benefit and then staff pay for it through a deduction to their monthly pay, made before NI and tax are taken off. Employees save on both tax and/or NI, while employers save on NI contributions.
Employers will gain most from benefits with the greatest spend, such as pensions, holiday purchase, childcare vouchers and vehicle leasing schemes, says Matt Duffy, head of online benefits at Lorica Employee Benefits. But savings from lower-value items with a high take-up, such as life assurance top-ups, can also amount to a tidy sum.”You do not even need significant take-up or spend for NI to cover the set-up and running costs,” says Duffy. “Over a three-year period, the minimum an employer could expect is to break even, but most will have a surplus.”
Childcare vouchers have been popular in recent years. Laura Czapiewski, product manager at Edenred, says: “An employer could save up to £402 a year in NI contributions if an employee is provided with the maximum possible value [of vouchers]. This will generally outweigh any charges paid to providers for administering the scheme.”
But one exception to this is when a woman is already taking childcare vouchers at the point of going on maternity leave, says Iain McMath, managing director of Sodexo Motivation Solutions, because deductions cannot be made from statutory payments.
Changes to childcare rules
Government changes to the childcare rules in April mean the amount of tax relief available to higher-rate employees is now less, with all staff receiving about £11 a week towards the cost of childcare, says Mark Groom, employment tax partner at Deloitte.
The rules for bikes-for-work schemes have also changed after a ruling on the VAT treatment of salary sacrifice purchases. Employers must now account for any VAT paid on benefits that attract the tax, including bicycles and gym memberships and the administrative costs of childcare vouchers, says Lorna McCaa, a chartered tax adviser and employee benefits specialist with Maclay Murray & Spens. The new regime comes into force on 1 January 2012, but it will not affect existing arrangements (read more on page 14).
Allowing staff to buy extra holiday is particularly attractive for employers because they benefit from reduced salaries on top of the NI savings. This is one of the benefits Cheshire West and Chester Council has offered staff in a scheme run by P&MM. The council estimates it saved £100,000 in its first year, with 185 staff signing up.
Lease cars are also attractive from an employer’s perspective. This is the latest addition to the council’s range of benefits, says Thompson, and fits in with its environmental goals because staff can only hire low-emission models, which carry lower rates of benefit-in-kind tax. Employees can choose from about 600 cars and sign a three-year, all-inclusive deal, she adds.
Matt Dyer, commercial director at LeasePlan UK, says: “In the latest Budget, the government announced it will freeze company car tax for cars with carbon dioxide emissions of less than 95g/km from April 2013 and increase tax for emissions between 95g/km and 219g/km by 1%. As a result, employers providing company cars, either as a benefit or through salary sacrifice, can also boost their tax savings by encouraging take-up of lower carbon vehicles.”
Pension savings are biggest
The biggest potential savings for employers are likely to come from pensions, says Inez Anderson, director in accountancy firm Smith & Williamson’s employment, tax and incentives group, by encouraging employees to allow the company to make payments on their behalf. “Every pound an employee pays into a pension that is not through salary sacrifice costs the employer 13.8p,” she says.
Rachel Brown, senior consultant at Towers Watson, says employers could save about 0.6% of their pensionable payroll in this way. “A scheme can be designed to maximise take-up and savings to the company,” she says. “We typically adopt an ‘opt out’ rather than ‘opt in’ approach and achieve take-up rates in excess of 95%.”
But employers should ensure staff can make an informed decision about whether to enter such schemes, says Nick Atkin, director at Atkin & Co, because signing up effectively reduces their headline salary. “Any life cover will usually be based on a multiple of salary and borrowing, such as mortgages, and tends to be assessed against basic salary,” he says. Lower earners could even fall below the level required to claim statutory maternity pay, too.
Other salary sacrifice options may be worth considering. James Malia, head of employee benefits at P&MM, highlights mobile phones, while HM Revenue and Customs-approved employee share schemes are also very tax-efficient, says Anderson.
Communication campaigns should include presentations, onsite promotions and quirkier techniques such as online soap opera-style videos, says Lorica’s Duffy. “Communication in standard corporate branding can appear dull,” he says. “Instead, create fun, off-the-wall campaigns, such as competitions and prizes that capture people’s imaginations.”
Another way for employers to increase awareness and take-up is to ensure schemes are available all year round, says Deloitte’s Groom. “If an enrolment period is only open once a year, it won’t be in people’s minds for the rest of the year.”
Ensuring staff understand the benefits that are available can not only generate savings, but also helps to attract and retain staff. Smith & Williamson’s Anderson says: “Staff will be asking more and more if there is anything they can do to prevent their take-home pay diminishing through tax.”
Read more articles from the Employee Benefits voluntary plans and tax-efficient benefits supplement 2011