Strategy & Operations » Leadership & Management » How to reduce salary sacrifice disruption and maximise talent retention

James Monks, finance director at RAM Tracking, explains how to reduce salary sacrifice disruption whilst retaining talent

The last few years have seen a significant increase in the adoption of salary sacrifice schemes by employers. Much of the popularity of these schemes can be explained by their mutually-beneficial nature for employer and employees alike.

As well as allowing staff to give up part of their salary in exchange for tax-free benefits, companies have also been able to pay lower National Insurance contributions on reduced employee wages – a situation viewed by many as win-win.  For the basic-rate taxpayer sacrificing £100 of their salary, tax perks have allowed them to receive £100 in benefits for a salary deduction of just £68.

However, following what HMRC described as a “proliferation of luxury schemes” at a high cost to the treasury, 2016’s Autumn Statement brought the controversial news that the Government would be axing salary sacrifice tax perks on a range of employee benefits.

Terming the difference between the tax paid on cash salary and benefits “unfair”, Chancellor Phillip Hammond announced that from April 2017 “employees who use these schemes will pay the same taxes as everyone else.”

Only a few politically-motivated benefits, such as pension contributions, childcare vouchers, ultra low-emission vehicles (ULEVs) and cycle-to-work schemes will be exempt from the charges.

What are the key dates that employers need to be aware of?

Employers looking at introducing salary sacrifice schemes should keep in mind that they have a 12-month window before the tax changes come in, as long as these are put in place by 5 April 2017.

With this in mind, companies should not delay in holding discussions with employees to see whether they are actually interested in receiving these incentives – if not, it is almost certainly not worth the effort of setting up.

It is important to note that the changes announced in the Autumn Statement do not constitute a ban on salary sacrifice schemes and employers can technically continue to offer these benefits to staff. However, in practice, the removal of tax perks on the majority of benefits makes them much less attractive to businesses and employers and as these changes coincide with the introduction of the apprenticeship levy, it only serves to increase the burden on organisations.

Communication is key

With these sweeping changes to salary sacrifice schemes certain to prove unpopular with employees, who have come to view these benefits as part of their remuneration package, it is essential that employers adopt a proactive and innovative approach to mitigating tensions among staff. An important part of this involves clearly communicating to the workforce about the incoming changes and taking care to emphasise that these are government, rather than company, driven.

Ultimately, the question that staff will want answering is ‘how is this going to affect my pay packet.’ Managers should speak to the payroll team before they have meetings with employees, to ensure they have all the facts, figures and information ready for each individual. The employer should clearly detail which tax benefits will be affected, and when the change will occur. Presenting examples of how the net pay will be impacted will also help the employee better understand how their own net pay will change.

Ensuring the worker fully understands that the removal of tax benefits to salary sacrifice schemes has been instigated by the government and not the company, will help maintain employee loyalty. The firm should explain that it adopted salary sacrifice schemes to help its own employees and will continue to do so if any new schemes become available. This will demonstrate to staff that the business wants to help.

When it comes to communicating with staff, however, it is vital to remember that it shouldn’t be a one-way process – communication should be an open dialogue. By having a dedicated member, or members of staff, who can be contacted at any point in regards to the upcoming salary sacrifice changes, employees will have an opportunity to raise any concerns, allowing managers to address them.

Alternative benefit packages

With a loss of tax perks certain to hit staff in the pockets, companies will also need to give careful thought to strategies for retaining staff, who may seek alternative employment which offers them a higher salary. It is important to remember that those likely to feel the impact of these changes the hardest are workers who are already struggling to make ends meet. Therefore, businesses should look at alternative ways to offer staff financial perks, such as a group benefits platform which allows employees to make savings across a range of everyday purchases. Alternatively, businesses could offer non-cash incentives – by implementing perks such as flexible hours and additional holidays, employers can help counteract any discontent resulting from tax changes by boosting overall employee wellbeing.

The incoming changes to salary sacrifice schemes will inevitably have an adverse effect on both companies and employees, with many areas of business feeling that the Government should instead be doing more to get people into work by maximising their disposable income. However, by taking the time to think carefully and innovatively about how to mitigate their impact on employees, companies can reduce disruption to business processes whilst maximising retention and productivity.

James Monks is finance director at RAM Tracking.