The Budget's HCI bombshell has left many questioning whether employers should rely on funding gained from such tax savings, says Debbie Lovewell

Case Study: Rushcliffe Borough Council

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For some employers, the removal of the home computing initiative (HCI) in this April's Budget announcement meant a lot more than merely losing a benefit to offer to staff. Those which chose to reinvest the organisation's savings on National Insurance (NI) contributions that the HCI provided in additional benefits options for employees have now been left to look for alternative ways to pay for schemes.

Flexible and voluntary benefits plans are two of the most common schemes that are often funded in this way. By using NI savings from a variety of tax-efficient benefits employers are able to offer their staff a greater choice of benefits than they may otherwise be able to afford.

Paul Farrell, head of flexible benefits at Aon Consulting, says: "There's no doubt that the savings have been the driving force behind flex." While these NI savings are often gained from a number of tax-efficient benefits that are available, such as pensions or childcare vouchers, the removal of the HCI will still leave a dent in some schemes' funding.

The extent to which this is likely to occur, however, is the matter of some debate. Keir Tutt, operations manager at 4th Contact, says: "Most of the time, [organisations] use the savings from salary sacrifice [benefits] to fund the administration [of a scheme] and don't necessarily [use it to] put schemes in. With the HCI, the saving is probably not sufficient to make a big difference [due to the take-up rates]."

For some organisations, however, losing even a tiny amount of funding from a scheme can make a big difference, particularly for small employers or those in the public sector. Niall Munro, CEO of benefits IT firm Staffcare, explains: "It's a big decision for some of these organisations. There's only so much money to go around." And no matter how much is needed, the sums required to fund a flex scheme cannot be conjured out of thin air. If organisations don't already do so, one option is to introduce a further tax-efficient benefits option. Offering a defined contribution pension scheme through a salary sacrifice arrangement, for example, can produce the greatest savings for employers.

Mike Ashton, senior consultant at Watson Wyatt, explains: "If funding is an issue, there are other sources that are available. If funding was a problem and organisations were looking to gain savings from salary sacrifice then pensions [offered in this way] would have created larger savings." Before going ahead with any financial changes, however, employers are advised to go back to basics and re-examine the budgets they have allocated to spend on benefits. "I think [employers] need to step back and say 'where were we before HCI?' It's almost going back to what an organisation is trying to achieve and ways of going about it. It's looking at what the overall HR budget is, what you are looking to invest, and making sensible assumptions about how things move forward," explains Ashton. But he encourages employers to make conservative assumptions about how the future is likely to pan out.

This view is echoed by Aon Consulting's Farrell, who adds that employers should have already taken this approach when initially implementing a flexible benefits scheme. "Prior to making the commercial decision whether to introduce flexible benefits, the organisation has to be informed of the current financial model and a less favourable one that incorporates the removal of the salary sacrifice savings," he explains.

Modelling projections for scenarios where the necessary funds are taken from other areas of the business can also be beneficial. But before panic-stricken employers affected by the changes reach for their calculators, they should be reassured time is on their side.

The NI savings gained from HCI will not disappear until the final scheme launched by an organisation ends. So those which crept in and managed to launch a final scheme ahead of April's deadline have just shy of three years before they will need to put an alternative in place. Andy Lister, head of benefits services at performance improvement firm Grass Roots, explains: "It's not a cliff edge where the funding suddenly stops. Within the three-year period, [employers] will need to re-address their business case."

Although advised to utilise the savings on offer from other tax-efficient benefits, some employers are understandably nervous about coming to rely on such funding following the sudden withdrawal of the HCI. "Experience of the HCI tells us that nothing is infinite in its timescale and there's always a chance the loophole could be closed. If one of the bigger benefits is closed such as pensions then it could have a significant impact on the cost [of a scheme].

Organisations should always be aware of that," warns Tutt. But this doesn't mean employers should refrain from making use of what is currently available. Alex Tullett, head of benefits communication at consultancy Jardine Lloyd Thompson Benefit Solutions, says: "Where you have the opportunity to provide benefits for the organisation and staff, it is best to use them for as long as they are there but don't pin your business hopes on them."

Overall, this view is typical of many working in the industry. "Organisations should not be overly negative but be transparent and honest, [flagging] up that employees should enjoy the savings while they last, but shouldn't rely on them being there forever," adds Farrell. Lister, however, believes that employers would be wrong to build a long-term business strategy solely around the potential savings to be gained from tax-efficient benefits. As the government introduces such tax breaks to support their own objectives, these can disappear as quickly as they are introduced following any changes in government policy.

Ashton agrees: "Never say never with any arrangement, whether it's salary sacrifice or anything else. Because you can never say never, I'm not convinced [employers] should rely on any form of savings." Employers, which use NI savings to fund additional benefits such as flex for staff, therefore, should ensure that they have the right motivation for doing so.

While it may be viewed as a positive move, unless they have a solid business case for doing so, it will be much harder to justify when looking for alternative funding should the tax breaks responsible for funding the scheme be removed. "If there's one thing that's come out of it, it's got to be strike while the iron's hot and provide benefits for the right reasons. Don't rely on making tax savings otherwise it may come back and bite you," concludes Tullett.

How does salary sacrifice work?

Under salary sacrifice arrangements, employees give up the right to receive part of their salary due under their contract of employment. This sacrifice is typically made in return for their employer's agreement to provide a non-cash benefit which has certain tax advantages for both parties. In these cases, employees can receive the benefit free from tax and Class 1A National Insurance Contributions (NICs) because it is given in place of salary on which both tax and Class 1A NICs would have been fully payable. Where the cost of loaning equipment to staff, as occurred under home computing initiative schemes, is offset through salary sacrifice arrangements, employers also save on Class 2 NICs, up to a limit of 12.8%, on the portion of salary sacrificed by employees.

Case Study: Rushcliffe Borough Council

Rushcliffe Borough Council was forced to rewrite the business case for its flexible benefits plan after the home computing initiative (HCI) was pulled.

The Nottingham-based council had initially intended to use the savings it would have gained from HCI to help fund its new flex scheme, the first election period of which will be opened for staff this month.

Tom Grainger, head of HR, says: "It would have put some money back into the pot, which would have been helpful. As part of our business case, we had made [cost] assumptions about the take up of HCI." But although the council was forced to re-examine parts of its business case with provider Prudential, Grainger said it would not introduce any additional perks in place of HCI. "We decided we would try to keep the scheme manageable so we left that gap as it was."

However, he adds that he was concerned the scheme may not appeal as much to staff without HCI, which could affect its overall take-up rates.