Category Archives: Employee Reward

Benefits In Kind – The Company Car

company car

Source: stockimages/Free Digital Images

We recently spoke to Duncan Mitchell of CED Accountancy Services about employer provided cars. The tax and national insurance effects impact the employer as well as an employee or director who has an employer provided car.

Duncan explained “An employer provided car results in a benefit to an employee or director upon which income tax is payable. The employer will suffer a Class 1A National Insurance Contribution (NIC) charge at 13.8% of the amount which is assessed as a benefit on the employee.

The amount of the benefit rises each year and the increases should be considered before a car is purchased by the employer. For most cars, we have got used to the amounts increasing by 1% each year but, from 6 April 2015, the amounts will increase by 2% each year.

Also the current cap on the percentage charge, currently 35%, will increase to 37% in 2015”

We reproduce a table that Duncan gave me illustrating his point:

Example

A car was purchased for use by a director on 6 April 2013. A car is normally kept for four years before it is replaced. The CO2 emissions are 130 gm/km and the list price is £30,000. If the car is a petrol car, the benefit on the director (and the income tax cost) and the NIC cost on the company are:

Tax year                           Benefit                   Tax           Employer

%                                            £                        (at 40%)         NIC

£                   £

2013/14                          18        5,400            2,160               745

2014/15                          19        5,700            2,280               787

2015/16                          21        6,300            2,520               869

2016/17                          23        6,900            2,760               952

Duncan explained that “The future increases may affect a decision as to when to replace a car. One of the reasons for the annual increase in the percentages is the work undertaken by car manufacturers to lower the polluting effects of a car which means lower carbon dioxide emissions. So, an equivalent new car purchased after April 2015 may have a lower tax cost if the CO2 emissions for that type of car have fallen significantly. Or you may decide that private ownership by an employee of a car would be a better option. Some research on the different types of car may well be worthwhile, Hybrid and electric cars tend to be tax efficient, and even high end marques such as Porsche and BMW have cars which demonstrate attractive tax efficiencies”

Duncan then spoke about the car fuel benefit

“For most businesses and employees it is not beneficial to have private fuel paid for by the employer. The CO2 emission percentage is applied to a set figure. The figure for 2014/15 is £21,700.

It is therefore, in many cases, better for the employer to pay only for the business mileage.

There are two ways to achieve this. The  employee can claim a mileage allowance from their employer for business travel or the business pays for all the fuel with the employee subsequently making good the whole of the cost of the private fuel provided. Both methods are based on HMRC issued rates although they are different rates and often confused.

The requirement to reimburse in full for private fuel has caught many employers out when HMRC have conducted an Employer Compliance visit”

Duncan Mitchell is a director at CEDAS (www.cedas.co.uk) . You can call him on 01327 358866.

Building an attractive benefits package for a Small to Medium Sized Business

The law requires all companies to offer certain benefits, but they can go above and beyond benefitsstatutory requirements, this includes small to medium sized businesses – the SME market.  An SME is defined as a small to medium enterprise with 250 employees.  Employee benefits are also known as fringe benefits or perks offered in addition to a basic salary.  Traditionally an attractive benefits package was only possible for larger companies with large budgets, however, as time has progressed and benefit provider costs have come down it is possible for even the smallest SMEs to be able to offer an attractive benefits package.

The reasons for creating an attractive benefits package are to recruit, retain and reward employees; this provides competitive advantage and helps to meet external as well as internal pressures.

At the heart of all forms of employee reward, including benefits, is motivation.  Employees need to be sufficiently motivated by the reward on offer so that employee engagement is encouraged.   Hardworking employees can be spurned on by a worthwhile incentive and, hopefully, those that do the bare minimum will strive to work harder.  Improved productivity will increase profits.

When designing a benefits package there are key issues to consider.  The main aim is to meet the aforementioned criteria so the SME has sufficient high quality committed employees.   Value for money is particularly important as an SME does not have loads of cash to splash around and waste.  Tax efficiency is important whilst refinement and tailoring is essential.

The first step is to decide the objectives of an employee benefits package.  It should certainly meet the requirements of the employer but also the requirements of the employee.  The objectives may look at matching benefit philosophy to SME strategic objectives.

Employees’ opinions can be sought in a variety of ways.  A few years ago I drafted a reward survey for a charity that included aspects of both financial and non-financial reward.  The results were illuminating as the most sought after forms of reward were non-financial and top of the list was flexible working.  Opinions could also be gathered from focus groups and/or interviews.  This process may be time consuming to gather and process the information, but is essential to develop a truly tailored package that employees will value.

Having collected the internal data related to benefit requirements, the next step would be to analyse what the competition is offering.  There are many benchmark reports available offered by the CIPD, Xpert HR and IDS for example.  By purchasing a report the data is readily available and all the hard research work has been done.

SMEs can also club together to create a pay club to share information on a confidential basis.  They are an attractive and cost effective way to gather information on benefits.  Membership can be tailored geographically, industry or company size, but a disadvantage is that it might be difficult to find SMEs to take part.

The internet can offer a wealth of information but this is also time consuming to find out where to look then sift through all the data available.

The next step would be to design an employee benefits system.  The variety, extent and type of benefit needs to be considered along with tax efficiency.  Employee benefits can come in all types of guises – both financial and non-financial.  Financial benefits obviously have a cost attached to them so budget and affordability is quite key.

Such benefits can include private health insurance, occupational sick pay, profit sharing, death in service benefit, income protection, life assurance, dental insurance, pension contributions (including enhanced contributions), interest free season ticket loan, car mileage allowances, annual Christmas bonus, annual bonus in cash or vouchers, critical illness insurance, mortgage assistance, relocation packages, company discount on products, professional fees payment, gym membership, long service award, overtime, unsocial hours payment and retirement benefits.  Since October 2012 companies must comply with pension auto enrolment according to their staging date.  SMEs have been affected since January 2014.  A company may choose to comply using the basic government package, NEST, but has the option to use a private pension provider provided the company size is large enough for the pension provider requirements. An employer can choose to pay in more than the basic contributions.   

The company car has long been seen as a worthwhile benefit, but tax can be high so many companies now offer a car allowance and/or free fuel on a card which may be more tax efficient.

Tax free benefits include employee meals, child care in workplace nurseries, luncheon vouchers, Christmas parties up to the value of £150, small gifts to third parties, training, outplacement and redundancy payments up to the value of £30,000.

Personal needs can be addressed with employee benefits.  These can include annual leave, maternity leave, paternity leave, adoption leave (all of which can be enhanced over and above the statutory requirement), compassionate leave, pre retirement counselling, financial counselling, canteen, and sports/social facilities, living accommodation, mobile phones.

Having non financial employee benefits in the mix is very cost effective and can vastly improve morale as well.  Non financial benefits can include flexible working, appraisal, training and development, career development opportunities, an employee lunch, Friday afternoons off, career breaks, promotion opportunities, free car parking, free tea/coffee/water, an employee assistance programme, free pension planning, long service certificate, employee of the month certificate, suggestion scheme, and an employee recognition scheme.

For cost effective purposes an SME may decide to design a flexible (or cafeteria) benefits system where employees can choose the benefits they take up.  The advantages of this are that costs can be controlled more efficiently and employees can tailor their own packages to suit their needs.  The benefit requirements of a young male employee with a growing family might be quite different to that of an older woman who is facing retirement for example.  Employees are provided with a shopping list of benefits and allocated a spend.  At the heart of flexible benefits there will be core benefits which all staff enjoy such as pension, life insurance, income protection and holiday entitlement.

Flexible benefits offer greater individual freedom of choice and an employee appreciation of the value of the benefits provided to them.

In recent years salary sacrifice has grown in popularity which helps to fund flexible benefits.  With salary sacrifice there are tax and national insurance savings.  The employee gives up part of their salary in return for a non-cash benefit.  The most popular types of salary sacrifice are childcare vouchers and pensions.

Flexible benefits can be introduced on a simple basis.  For example one of my clients allows their employees to buy more annual leave once they are fully qualified.   With a very simple system it is possible to manage this on spreadsheets and wordprocessed documents, but for a larger offering, an SME may need to consider using an in house or outsourced computerised system.

Another type of benefit includes voluntary benefits where an employee can choose to pay for a certain type of benefits.  These include cycle to work, pension contributions and childcare vouchers, retail and leisure discounts, gym membership and discounts at local shops and restaurants.

Consultation with staff before finalising the benefits package is essential and, where possible, changes can be made before final implementation.  Consultation can be undertaken using focus groups or with one to one interviews so that opinions can be sought.  Consulting with staff will ultimately get buy into the finished product.

Following design of a benefits system it is important to set out in writing the framework in which it will operate – who gets what and the circumstances. Employees will need to be informed as to their entitlement and what they will gain from the package.  Details on monitoring and costing are also important to document.   Using total reward statements can help to show pictorially, the benefits value to individual employees.  Using graphs or pie charts the benefit offering can bring a package to life so that it seems more worthwhile and understanding is greater.  Total reward statements can be made available online or in paper format.

Whatever benefits system is implemented, it is important to monitor how much is spent on each benefit and how much it is used.  There should be regular surveys undertaken with employees to ensure it is fit for purpose.  Corrective action can then be taken if the budget is being exceeded or certain benefits are not being taken up. Also some benefits may become less tax efficient so SMEs need to keep abreast of HMRC changes.

The introduction of a benefits system needs to be well planned.  Employees should know what is happening, why it is happening and how it will affect them.  This can include the use of media and face to face discussions.  Booklets, posters, newsletters, presentations and online communications can all be used to get the message across.

SMEs can now truly take advantage of employee benefits and design an attractive tailored package that will improve morale and ultimately the bottom line allowing them to effectively compete in the market.

 

Employee Reward On The Up

Employee reward

Courtesy: Free Digital Images

After the dearth of the recession years, employee reward is on the up and compensation and benefit issues are in the spotlight.

For many years salaries have stagnated with few companies being able to offer a pay increase and many making many job cuts.  But along with the current buzz of increasing recruitment, pay seems to be top of the agenda with pay awards of around 2.5% being anticipated this year and reward structures being assessed for fit for purpose reasons.

As I blogged about recently there is a skills shortage in the UK so it is important the companies hold onto their talent and make sure they are incentivised.  Pay can be a big incentiviser for some, but employee total reward encompasses financial reward with motivational aspects such as career development, job satisfaction and recognition.  To retain and recruit talent companies may have to consider paying above the market rate.

Employee reward specialists have always been thin on the ground, but now, more than ever, they are needed to help organisations develop reward solutions to support business strategy.  Employee reward professionals can help with employee reward strategy, analytics to assist with pay and benefit reviews, job evaluation which links job size to pay and defends equal pay claims, flexible benefits, salary sacrifice schemes, bonuses, commission schemes and pensions particularly pension auto enrolment.

Total reward statements can help employees to see the full effect of the benefits they receive.  So many employees do not understand the benefits a company provides to them.  All benefits can be included such as maternity pay, health insurance, employee assistance programmes.  Seeing financial employee reward on paper as a simple pie chart or graph can add to employee retention.

It makes sense for employers to reward their staff well to encourage motivation that will impact on the bottom line.