Simply offering a top-notch salary to attract and retain staff is no longer enough. The employee benefits industry is growing rapidly and, with it, so are employees’ expectations.
A good benefits package is now a sign of status in a business like yours and is the key to motivating a top-performing workforce. Read on to find out what the most effective schemes available to you are:
HEALTHCARE
While you cannot prevent employees from becoming ill, healthcare benefits can help them return to work more quickly, reducing absence costs and boosting productivity. These benefits are a valuable recruitment and retention tool, which will increase staff loyalty and earn your business a caring reputation.
PRIVATE MEDICAL INSURANCE (PMI):
• Helps with the costs of private treatment and enables staff to jump hospital waiting lists.
• Most policies do not cover HIV/AIDS and pre-existing medical conditions.
• PMI is also perceived to be the most expensive healthcare benefit. Tobin Coles, sales director of Jelf Corporate Healthcare, estimates that businesses like yours can expect to pay about £700 per person per year.
INCOME PROTECTION (IP):
• Pays an ongoing monthly income to employees that become physically unable to work.
• You should expect to pay somewhere between 1.25% and 1.5% of payroll.
• If an employee uses IP, the cost will rise because you are legally obliged to continue paying for all their benefits plus National Insurance (NI) and any pension contributions.
CRITICAL ILLNESS COVER:
• Pays employees a single tax-free lump sum should they suffer permanent disability or a serious illness.
• Most schemes cover a core list of approved conditions, which can be extended for a further charge.
• Premiums are based on age, gender, health, family history and occupation.
• Once the payment has been made employees are removed from the payroll, making them less of a long-term liability.
HEALTHCARE CASH PLAN:
• Provides tax-free contributions towards the cost of everyday treatments such as prescriptions, dental and sight tests.
• Prices start from £1 per person per week, which is often passed on to employees.
• Only helps to fund, not provide, treatment.
PENSIONS
Businesses that offer a good pension scheme also score highly in the recruitment and retention stakes. Understanding pensions can be tricky but advice is available from pension consultants and bodies such as the Occupational Pensions Regulatory Authority (OPRA) or the Pensions Management Institute. There are four main types of scheme:
FINAL SALARY SCHEMES:
• Pay employees a pension based on a percentage of their final salary. This is calculated using their basic salary (excluding commission, bonuses or benefits) and depends on their length of service.
• The most attractive type of scheme to employees, but few businesses are now establishing fresh plans.
• Your business takes the financial risk and you will need to provide additional funding if a deficit occurs.
MONEY PURCHASE SCHEMES:
• Money is paid into a fund which is invested on an employee’s behalf. Whatever is in the fund when they retire is used to buy an annuity which provides a regular income for life. Part of the fund can be taken as a tax-free lump sum.
• Employer contributions are fixed.
• Members take the financial risk if stock markets and other investments do not perform.
STAKEHOLDER SCHEMES:
• If you employ five people or more and don’t provide access to an occupational pension, you must provide a stakeholder scheme.
• You are not legally required to contribute to the fund and members take any financial risk.
• Employees who join the scheme must be offered a payroll deduction facility to enable them to make contributions.
• A list of stakeholder providers can be found on OPRA’s website at http://www.opra.gov.uk/
GROUP PERSONAL PENSION SCHEME:
• A cluster of individual pensions, which are built up by each member. You must collect their contributions through your payroll system and pass them onto the pension provider.
• Unless you contribute at least 3% of salary on behalf of employees, you must also offer a stakeholder scheme. To promote the scheme as an attractive benefit, you may have to increase your contribution.
• Typically offered by newer businesses with no previous scheme history.
• Members take the financial risk.
CASH BONUSES
Some employees will always be motivated by money, particularly those in strongly performance-driven environments, such as sales. Cash bonuses can be awarded as a one-off payment when staff motivation needs a boost or linked to performance targets and paid on a more regular basis. Philip Hutchinson, director of HR and reward consulting at AWD Consulting, says: “If you can’t offer the same pay package as your larger competitors, one of the things you could do is offer a fairly low basic salary but a really good bonus scheme because you won’t have to pay the bonuses unless staff bring the money in.”
HOLIDAYS
You must provide all employees with a minimum of 20 days holiday a year, although this can include bank holidays. Many businesses like yours offer above this to differentiate themselves from competitors. And linking holiday entitlement with length of service provides staff with an incentive to stay.
FAMILY FRIENDLY
December’s pre-Budget report extended the amount of statutory parental leave and pay that you must give to employees. This takes effect from April 3 when statutory maternity, paternity and adoption pay is increased to £106 a week. From April 2007, paid maternity leave will also be extended to nine months.
Fathers are entitled to up to two weeks paid paternity leave and all parents of children under the age of six have the right to request flexible working. More information is available from the Department of Trade and Industry and the Inland Revenue.
Offering flexible working arrangements to all employees, however, can increase staff loyalty and motivation.
FLEXIBLE BENEFITS
Benefits can also be offered flexibly by giving employees a set amount of money to spend on a range of options. Flex schemes run for 12 months at a time and employees can only change their selection if they experience a lifechanging event.
Staff will appreciate the chance to customise their benefits package and you can also extend some options to cover an employee’s family. This won’t cost you any extra but is highly valued by staff. Flex schemes can include healthcare options, pensions, financial products and many of the tax-efficient benefits.
VOLUNTARY
Voluntary benefits schemes also offer employees flexibility. These are a range of discounted products or services that you make available to staff, but which they purchase themselves. These can include optical, medical and dental cash plans, childcare vouchers and leisure services such as gym membership.
With the exception of providers such as Lloyds TSB’s Bringme, Halifax and certain companies that focus on the worksite marketing of financial products, most charge a set up fee and on-going per employee per month fee. This will range from £2 to £10 depending on the supplier and the number of employees involved. Alternatively, you can negotiate discounts on an ad hoc basis in local shops and facilities.
STATUTORY REDUNDANCY PAYMENTS
After two years’ continuous service all employees are eligible for a redundancy payment if you eliminate their position. The amount is based on employees’ length of service: those aged between 18 and 21 will receive half a week’s pay for every year of continuous service, staff between 22 and 40 will receive a week’s salary for every year, while those aged between 41 and 65 can expect a week and a half’s pay for each year they have worked for you. However, the weekly entitlement is capped at £270 if you don’t want to pay the full amount. The first £30,000 of these payments will not be taxed.
CREATIVE SCHEMES
To ensure you get the most from your benefits package, it is vital it appeals to your employees. There is little point investing a great deal of time and money in a scheme if staff do not to use it. So a little creativity can go a long way.
Consider what your employees are most likely to value. Beers on a Friday, half a day’s leave to accompany a grandchild on their first day at school and even hugs and kisses are all offered in businesses like yours.
John Whiteley, head of diversity at business psychologists, Pearn Kandola, advocates a creative approach: “Those sorts of policies are starting to differentiate the better employers.”
TAX-RELIEF BENEFITS
For tax purposes, the above options are all treated as benefits in kind and are taxed as employment income. But there are exceptions. Alastair Kendrick, director of PAYE and NI solutions at accountancy firm Ernst & Young, explains a range of benefits that qualify for tax relief.
“These are typically offered to staff through a process of salary sacrifice when an employee gives up the right to receive part of the salary due under their contract of employment. The sacrifice is made in return for the employer’s agreement to provide a benefit.” Before implementing any of these schemes, however, Kendrick recommends seeking professional advice “to ensure you are structuring it correctly”.
Elizabeth Graves, from the employment, pensions and benefits department at law firm Freshfields Bruckhaus Deringer, adds: “You want to ensure the terms of the arrangement are carefully drafted.” This should clearly set out who pays for what and what will happen if staff leave your employment or abuse the benefit.
FLEXPHONE
Mobile phones are the latest benefit to offer tax advantages. The scheme, which is offered by tax firm BDO Stoy Hayward and Isis Telecommunications, creates savings on employee tax and NI. You must initially pay for the phones and bills and claim the costs back from employees through salary sacrifice.
Employees will also value the competitive prices that your bulk-buying power can negotiate.
HOME COMPUTING INITIATIVE (HCI)
HCI schemes were launched in 1999 following the Chancellor’s announcement of a £500 annual tax exemption on loaned computers, but only started to gain momentum last year. Through a home computer scheme, you can loan employees a computer and any other equipment that is functionally dependent on it, tax and NI free. You will also save on NI at 12.8%, equal to £64 a year.
Employees then repay the cost through salary sacrifice, typically over three years, making HCI an effective retention tool. At the end of a scheme, you can sell the equipment to employees for a fair market price. A scheme can take anything between three months to a year to implement.
You must also apply to the Office of Fair Trading for an exemption to protect against an employee’s right to cancel because the HCI falls under the Consumer Credit Act. For more information visit www.dti.gov.uk/hci.
CYCLE TO WORK INITIATIVE
Like the HCI, this enables you to lease a bicycle to employees, usually for an 18-month period. The employee can then purchase the bicycle for the price of one month’s lease at the end of the scheme. The initiative saves employees 22% in income tax, 11% on NI contributions and avoids VAT.
The 2003 Budget also removed the limit on the number of free meals a year that you can provide tax-free to cyclists on designated cycle to work days.
CHILDCARE PROVISION
From April 6, you can provide employees with £50 of childcare vouchers or employer-contracted childcare tax and NI free.
Tax relief is also available on season ticket loans up to £5,000; £150 worth of pensions-related financial advice; staff parties and annual celebrations up to a limit of £150 per employee; corporate gifts up to the value of £250 and long service awards up to the value of £50.
With this number of options on offer deciding what to offer isn’t always easy. Hutchinson explains: “There isn’t really any limit to what you can put into a benefits package but you have to make it fit with your business strategy. If you put too many products into a scheme, it dilutes it slightly.” But get the mix right and you will benefit just as much as your employees.
