People are both a major asset and cost of business. In today’s climate, the oil&gas industry is facing a skills shortage, making recruitment one of the biggest challenges to overcome.
The talent pool is getting smaller and everyone is fishing from the same pond.
Attractive salaries are a basic and key requirement to finding and keeping the right people. “Smart benefits” play a significant role in attracting, incentivising and retaining staff while controlling salary costs.
Smart benefits are benefits that can be offered tax efficiently to employees in exchange for an effective salary sacrifice. They can come in many forms, including pensions, childcare vouchers, green travel, staff restaurant facilities and parking.
Salary sacrifice by employees reduces the amount of national insurance contributions (NICs) payable, not just by employees, but by employers, too. Employees’ tax is also reduced. In exchange for the reduced salary, employers can pass on the employment cost savings generated by salary sacrifice by providing their employees with benefits that would previously have been paid for out of their net income.
The savings that employers and employees can make through the introduction of smart benefits are dependent on a number of factors, particularly the number of participating employees, average earnings and the expenditure on the selected benefits. Crucially, smart benefits are scalable, so few barriers exist to the size of employer that can take advantage of them.
As a guide, combined annual employer and employee savings will be in the region of £525,000 with 500 participating employees, assuming an average salary of £35,000 and an annual salary sacrifice of £2,400.
Employee pension contributions are deductible for income-tax purposes, but are not deductible for NIC purposes, meaning that both employer’s and employee’s NICs are due on the pay contributed to a company pension scheme. Employer pension contributions, on the other hand, do not attract income tax or NICs and are therefore effective for tax and NIC purposes for both the employer and the employee. Therefore, “smart pension” schemes based on salary sacrifice are the starting point for many employers seeking savings.
Under a smart pension arrangement, an employee agrees to reduce salary by the amount that he or she would have contributed into the pension scheme. In return, the employer makes additional contributions of at least this amount. The arrangement generates cost savings to both parties: the employer enjoys reduced employer NICs and the employee benefits from an increase in net pay as a result of the reduction in employee NICs.
More companies are looking to provide better support to employees who have young children. Effectively communicated, one particularly powerful option for companies is to make cost-efficient childcare assistance available to their staff. In return for an agreed level of salary sacrifice by employees, employers are able to provide various forms of childcare at no cost to staff.
In the right circumstances, this arrangement can generate cost savings to the employer arising from the reduction in employer’s NICs, but principally increases employees’ net pay by, typically, £900 per year from an income tax and NIC saving on the costs they previously incurred on their childcare arrangements.
In an age where corporate responsibility and the green agenda have become key factors in the way that business operates, it is regarded as best practice for employers to be proactive in encouraging their employees to make sustainable transport choices. Cost-efficient arrangements can be used by employers to reinforce their existing green travel policies.
Many employees of companies with green travel policies will already be benefiting from some level of employer-provided discount on travel to and from the workplace using a means of transport that is regarded as environmentally friendly, such as public buses or a minibus service laid on by the employer. Under a green travel arrangement based on salary sacrifice, however, employees could receive free travel on these modes of transport rather than having to pay for them out of net income.
Likewise, in cases where employees are using their own cycles to travel to and from work, or are interested in doing so, the employer can provide employees up to two cycles for this purpose at no cost if a salary sacrifice arrangement is set up.
It’s not just pension schemes, childcare assistance and travel to and from work that employers can provide at no cost to their employees through cost-efficient arrangements. Employers can also use similar arrangements to offer a wide range of other smart benefits, including:
Free staff meals in a canteen on the employer’s premises.
Free parking for cars, motorcycles or vans at or near the employee’s workplace.
Free or discounted use of employer’s goods and services.
Free mobile phones for employees, including the cost of all calls.
Free use of workplace sports or recreational facilities.
Free work-related training courses, including study towards professional qualifications, annual subscriptions to professional bodies, scholarships and related training costs such as materials, equipment, books and travel.
Rent-free living accommodation in employer-provided dwellings.
Up to £8,000 towards the cost of relocation as a result of starting a new job, changes to the duties of an existing role or changes to the location of the place where the duties of are performed.
While there is no doubt that smart benefits are able to deliver a wide range of cost savings, it is important for employers to be aware of the various issues that surround them and to take all necessary steps to ensure that their proposed arrangements will succeed.
The first step is to examine all the legal implications of the proposed arrangements in order to establish that they would be beneficial to employees.
A further step for employers is to enter into dialogue with HMRC and gain official clearance for their proposed arrangements. In recent months, HMRC has challenged proposals by companies for a number of arrangements based on salary sacrifice, in particular tax-efficient meals in the staff canteen. Most notably, HMRC has expressed concern that if an employee retains control over the money that he or she intends to sacrifice, it continues to be the earnings of the employee and therefore remains liable to tax and Class 1 NICs. It is essential, therefore, that the arrangements are set up in such a way that the contractual sacrifice is effective for employment law (and therefore tax) purposes.
Like all tax planning, this highlights the need for care in the detail of setting up any smart benefit arrangements to ensure they have been constructed in accordance with the provisions of the relevant legislation.
Consideration should be given to any systems changes that will be required and the implementation costs in time and cash. In addition, a powerful communications strategy should be drawn up to sell the benefits of the new arrangements to employees.
While it may appear obvious to employers that the new arrangements make sense for their staff, it is unwise to assume that all employees will automatically decide to take up the benefits on offer.
Smart benefit arrangements that are properly structured and effectively communicated make sense for employees and employers alike. With the end benefits outweighing significantly the issues encountered in creating and implementing such arrangements, taking advantage of smart benefits is a protective investment in the war for talent.
Allan Duncan is a director at Ernst & Young and leads the human capital tax team in Aberdeen