Benefits pay-off

The number of employers offering flexible benefits such as salary sacrifice
options to their staff has increased steadily in the past few years, according
to recent research. However, separate government-backed research has found that
such schemes are of little benefit to low paid and part-time employees.

The annual Employee Rewards Watch of 468 employers by benefits provider
Thomsons Online Benefits reveals that the number of employers who have
implemented a flexible benefits scheme, or are considering doing so, has almost
doubled between 2004 and 2006 from around one-in-six to one-in-three.

The most widely implemented salary sacrifice option by far was childcare
vouchers (80%), with roughly equal numbers offering salary sacrifice for pension
(40%) and home computers (38%), the survey reveals. Over the next year, around
one-third of respondents are considering implementing salary sacrifice options
on home computers (34%) and bicycles (33%).

This year’s research showed that flexible benefits are no longer seen as
merely a costly add-on, with more than three-quarters of respondents reporting
that schemes have helped staff recruitment.

A salary sacrifice scheme is where an employee gives up part of their gross
salary due under their contract of employment and, in return, the employer
agrees to provide a benefit. For instance, under a pension salary sacrifice
scheme the employee would sacrifice part of their pay in return for their
employer making an equivalent contribution to the pension. This way the employee
saves on income tax and both the employer and employee save on the National
Insurance Contribution. The employer can use the NIC savings to run the
sacrifice scheme, or to top up the employee’s pension because employers do not
have to pay 12.8% NIC on employer contributions to a pension scheme.

Popularity contest

The potential future growth of flexible benefits is underlined by the fact
that 45% of respondents who currently operate a standard benefits package have
considered implementing them. Around four-in-ten companies that have employee
benefits have implemented salary sacrifice, with a further two-in-ten intending
to in the next year. Just over 40% maintained that they had generated the level
of tax and national insurance savings they had expected as a result of
implementing salary sacrifice.

Michael Whitfield, managing director of Thomsons Online Benefits, says that
“flexible benefits and salary sacrifice continue to grow in popularity and it is
gratifying to see three-quarters of companies with flexible benefits noting
their positive impact on recruitment.”

However, the survey highlighted some worrying issues for employers. For
example, almost half of the respondents with benefits admitted that they do not
know how much they are spending on them, while fewer than a quarter said they
have measured the cost savings their scheme has generated.

One employer, which has successfully implemented a flexible benefits scheme
is Loyalty Management Group (LMG), the company behind loyalty card scheme
Nectar. Under its ‘Sweeter Rewards’ scheme, employees are offered the
opportunity to spend up to 20% of their salary on flexible benefits, including
salary sacrifice options on their pension and childcare vouchers. Employees are
also offered a range of benefits including discounted car rental, eye care,
video/DVD rental and wine.

However, salary sacrifice schemes are not such a good idea for everyone, it
seems. Actuarial firm Punter Southall warns that organisations will need to
consider the implications for employees and the impact on their entitlements to
working tax credit, child tax credit, state pension and maternity pay. There are
also national minimum wage implications because of the way salary sacrifice
affects gross pay calculations.

On the down side

Probably the most significant disadvantage, says Punter Southall, is that the
individual’s gross salary is reduced by salary sacrifice. This means that
benefits that are calculated by reference to gross salary, such as life cover or
defined benefit pensions, could also be reduced. “If the individual was
interested in making salary sacrifice arrangements to maximise benefits before
‘A-Day’ [when the government introduced pension changes on 6 April] then the
effect of these reductions may not be significant in the long term. However,
individuals may want to consider taking out additional life cover in the event
that they die while their salary is temporarily reduced, assuming that this is
possible within current HM Revenue & Customs limits,” says the firm.

Some companies may be prepared to continue to link such benefits to the
higher salary. Individuals who are looking to take out a mortgage during the
period when their salary is reduced will need to be aware that the amount that
mortgage lenders are prepared to lend may also be reduced. There may also be
possible implications if gross salary is reduced to a level that may affect
entitlements to state benefits. Salary sacrifice cannot reduce a member’s
pension below the minimum wage.

The Low Pay Commission also warns some employees of potential pitfalls about
engaging in a salary sacrifice scheme. It reported this year that most low-paid
workers would be better off claiming support for childcare through the Working
Tax Credit system than by joining a company salary sacrifice scheme for
childcare vouchers.

The commission found that salary sacrifice schemes for home computers,
bicycles and other benefits were “less common and less well developed” and that
“employee take-up rates in firms that offered these benefits were often low”. In
addition, the commission found that “many part-time, low-paid workers would gain
no advantage from these schemes” and that “some workers might see their wages
reduced in return for a benefit of little or no value”.