Archive for the ‘Salary Exchange’ Category
Give your employees a pay rise at no cost to you. Here’s how!
With the Eurozone in continued crisis, more cuts on the way and talk of a triple dip recession; keeping the lid on business 
finances is vital. But how does that affect your employees?
In many businesses April is pay review time. How will your employees feel if their take-home pay is falling in real terms? It seems that all but the top performers and job hoppers have seen their spending power fall in recent years with little prospect of recovery.
Fed up employees impact on your bottom line. Whether it is failing to come to work with their A-game, distracting others with their tales of woe or the simple act of quitting to go to a better paid job, they can undermine productivity and stop your business reaching its potential.
So its a delicate balance, as always, between payroll and profit and loss. However, if you’re looking to reward your employees there is another way. Employee benefits are a great way of putting money in your employee’s pockets without increasing your costs. In some instances it can actually end up saving you money.
Perhaps the best route to achieving this is through salary sacrifice – something many overlook. Both the employer and employee can benefit in the form of NI savings and/or reduced tax. Here’s a quick run through of how it works.
- Decide which benefits you want to offer your employees. These can be childcare vouchers, pension contributions, medical cash plan, cycle to work schemes, cars, laptops or wider benefits.
- Find a benefits platform to administrate your scheme. This part will cost you but don’t worry their fees will normally come out of the money you’ve saved in National Insurance and tax.
- Offer your employees the chance to voluntarily reduce their salary by the value of the benefits they want. These are then paid directly by the employer.
The recent changes to Child Benefit for higher earners means that some of your affected employees could end up getting some of their Child Benefit back if they use salary sacrifice.
As with any benefit, salary sacrifice needs careful explanation and communication to your employees. They will need to think about the impact of giving up salary in favour of benefits. In some instances they’ll need to get financial advice.
Sounds a good deal doesn’t it. Now if only you could find a company that’s interested in your business, can help you deal with all this, select a provider, source the benefits, communicate with your staff and give financial advice to your employees. The great news, if your reading this, is that you already have. 44 Financial have many years of experience of working with businesses like yours to install salary sacrifice schemes.
If you want one of our consultants to contact you simply click here.
Steve Clark
Salary Sacrifice–Minimum Time?
We’ve been getting a number of questions from our clients regarding the minimum amount of time that a salary sacrifice agreement must be in place for.
This has come into sharper focus when looking at the new pension rules from October 2012 that will mean that employers have to automatically enrol employees into a workplace pension. Well those all round good eggs at HM Revenue & Customs have kindly produced an FAQ on the subject.
You can read the document here in all it’s glory.
The interesting part is when they discuss the new rules. HMRC says:
“Consequently, it is not necessary to stipulate a period for which the arrangement must be entered into or to set out "lifestyle changes" in relation to salary sacrifice for the workplace pension scheme.”
That’s good news for employers who have often struggled to define “lifestyle changes” to their employees. It also helps to reassure employers that they won’t be liable for a tax bill if the employee opts out of salary sacrifice.
It’s worth remembering that salary sacrifice needs to be established carefully and is a balance between changing your employees contracts and altering your benefit contributions. As always, it’s worth making sure that you get some advice when setting up a new arrangement.
Steve Clark
Salary Sacrifice – Is yours effective? 4 Top Tips to help you make sure
A recent case involving Reed Employment and the HMRC has led to an estimated tax bill of £158 million. It all revolves around a Salary Sacrifice arrangement covering temporary workers’ travel expenses.
However, one of the main things that has come out of the ruling is that HMRC have had to be a bit clearer on what constitutes a valid arrangement. As Salary Sacrifice is used by a huge number of employers to cover anything from Childcare Vouchers to Pension Contributions and Bike to Work. We’ve therefore set out five tips to help you make sure that your Salary Sacrifice arrangement is effective.
1. Don’t let your employees opt-in or opt-out at their will
HMRC have always stated that if a “lifestyle change” occurs the employee could withdraw from the arrangement. Allowing your employees to opt in and out willy-nilly will probably mean that your arrangement is not effective.
Rather helpfully HMRC have never defined what they mean by “lifestyle change”. Generally it’s taken to mean unforeseen life events (e.g. redundancy of a partner, pregnancy of employee or partner, marriage or divorce of employee) where an employer might agree to revisit an existing contractual arrangement to take account of a change in circumstances.
2. If your employees give up salary it must be for an identified benefit
If your employee has reduced their salary it’s got to be in return for some clear benefit. A good example if pension contributions where, in return for taking less salary, the employee gets a pension contribution from the employer.
3. Your employees must be able to make an informed decision
Communication is the key here. The employee has got to be able to understand the consequences of entering into a Salary Sacrifice arrangement. It’s difficult for an employer to work out whether it’s in every employee’s interest as that’ll be down to their own financial and tax position. What the employer can do is provide a balanced view on the advantages and disadvantages of the arrangement.
4. Your scheme must be incorporated into your employee’s employment contract
Entering into a Salary Sacrifice arrangement means that the employee has accepted a change to their terms and conditions of employment. Therefore their contractual agreement with you as their employer has changed.
Although it’s not a requirement of the legislation an employer can submit the Salary Sacrifice agreement to HMRC for approval. When they get asked HMRC basically check three things.
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That an effective variation of the contractual terms and conditions has taken place
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The employee’s cash earnings have been reduced and a benefit-in-kind provided
- The benefit-in-kind has been treated correctly for tax and National Insurance – e.g. p11d
Summary
Salary Sacrifice is a great way for employers to provide benefits in a tax efficient way for employees. However, if the arrangement isn’t set up properly you and your employees could end up with a large tax bill. The watchword, as always, is to tread carefully and get some professional advice.
Steve Clark
44 Financial Ltd regularly advises on Salary Sacrifice arrangements for our clients and works with other professionals to ensure that these are effective. To find out more about what we can do for you contact us by clicking here.
NEST on the back of a brown envelope
We’ve written quite a bit about NEST and auto-enrolment recently. It’s the pension monster coming over the hill for UK employers.
In this post we wanted to share with you some work that we had been doing with a prospective client of ours. After all why keep all the good stuff to ourselves! We’re spending quite a bit of our time looking at the financial impact of the new pension rules and helping employers understand the impact. To do this we really need to be talking to the HR and Finance Director as the new rules will affect both areas – but in radically different ways. In this post we are going to look at our discussions with the Finance Director of one of our prospective clients. It involves the back of an envelope calculation in true pension consultancy fashion!
EHF Manufacturing
EHF Manufacturing is a successful company in Leicester that’s involved in manufacturing – seems to be a rarity these days. The owners manage the business. We deal a lot with owners and managers. It’s a sector the market that we really enjoy working in. There’s nothing to beat giving advice to the people who actually own the business.
Where are we starting from?
EHF Manufacturing employs 116 employees. There are 16 employees in Management and Admin and 100 employees in manufacturing and sales. The total payroll shown in the accounts is £2,100,000. Crudely that gives an average salary of £17,600 give or take.
The existing pension cost is £40,000 per annum. This works out at less than 2% of payroll. It all points towards a really low take up of pension membership. Not good as far as the new rules are concerned. With average salaries of £17,600 per annum these are exactly the section of the UK workforce that the government want to force to save through workplace pension schemes. So far so good – unless you write the cheques that is.
Where do we need to get to?
We’ve been talking to the Directors about some succession planning and they are looking at an exit in the next five to seven years. It’s a profitable company with a good market and should be relatively easy to sell.
We started to work out the cost impact of enrolling everybody in some sort of pension scheme. We assumed that about 80% of employees were not covered by any pension scheme. That’s 92 employees that EHF Manufacturing is going to have pay pension contributions for.
The good news for the Finance Director is that the staging date when EHF Manufacturing will have to start paying for the 92 employees is 1 June 2014. So they have some time to work out their NEST survival strategy.
The back of the brown envelope
If none of the 92 employees opt-out of NEST (or the EHF Manufacturing Scheme) it’ll cost the company as follows:
| Time Period | Employer Contribution | Estimated Annual Cost |
| June 2014 – September 2016 | 1% | £11,040 |
| October 2016 – September 2017 | 2% | £22,080 |
| October 2017 onwards | 3% | £33,120 |
Is it Exit stage right for the Directors?
You’ll see that this makes a dent on the profit margin of the business. Will this deter investors or purchasers? What about the management and admin time spent implementing and communicating this to employees? This will all take place slap bang in the middle of the time when the Directors are looking to exit from the business.
NEST Survival Strategy
Although these calculations were all done on the back of an envelope (an HMRC one at that!) with a set of accounts the solution will take more organisation. We’ll be talking to EHF Manufacturing about:
- Their pay reviews over the next few years to build up a reserve for NEST.
- Salary Exchange as a way of reducing the impact.
- How the message needs to get out to employees.
- Whether EHF Manufacturing use NEST or their own pension scheme
We’ll be looking to prepare a NEST Survival Strategy for EHF Manufacturing. We’ve shown you our homework we’d love to see yours. What are you doing about auto enrolment and factoring in the cost and upheaval into your business plans from 2012 onwards. We’d love to hear. Leave a comment and let us know what you’re thinking.
Remember – A dwarf on a giant’s shoulders sees the further of the two.
The Small Print
Please take a few minutes to read our disclaimers here.
Related Articles
- Small firms ‘failing’ on pensions (bbc.co.uk)
- Auto-enrolment is “extortionate expense” for small firms (telegraph.co.uk)