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”.