Special report on salary sacrifice

In this first feature of this three-part special report, Alison Coleman explains how offering non-tax efficient perks through salary deduction has become an increasingly attractive option for employees

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Offering non-tax efficient benefits through salary deduction is becoming increasingly commonplace, particularly through flexible benefits schemes where a wide range of benefits secured through bulk purchasing are offered to staff at discounted prices.

Typically, these include products such as retail vouchers, gym membership and dental insurance, which attract no tax or national insurance benefits but are attractive to staff and inexpensive for employers to administer.

John Bohan, account manager of corporate gift vouchers at John Lewis Direct, says: “They allow organisations to broaden their benefits provision without it costing them a lot of money. Retail vouchers allow staff to make real savings on things like their weekly shopping bills, and DIY purchases, which gives them a real sense of value. For that reason, they are likely to appeal to a larger proportion of the workforce.”

However, there is a crucial distinction between salary sacrifice arrangements, and salary deduction. Salary sacrifice is a reduction in gross pay, before tax and national insurance contributions (NICs) are paid, which works well for benefits that are not subject to separate tax and NICs, such as pension contributions, and childcare vouchers. Salary deduction, for the purpose of offering products with no tax advantages, such as vouchers and health club membership, comes out of employees’ net pay, after tax and NI have been taken out.

Andy Lister, head of benefits services at performance specialists Grass Roots, says: “This is purely an allocation of salary for a particular purpose, the main incentive being that employers can obtain preferential terms or discounts on products that would not be available to employees if they were purchasing them direct.”

Retail vouchers are one of the most popular non-tax efficient benefits available through salary deduction. Employees must commit to the scheme for a full year. At the outset, they select the combination and value of vouchers they want to receive each month and deductions are then made from their net salary at the discounted rate.

BSkyB introduced discount retail vouchers as part of an integrated salary sacrifice scheme, with the vouchers dealt with as a deduction rather than a reduction. Sky Choices, launched last year, previously offered conventional tax-efficient benefits such as childcare vouchers and bikes. However, the addition of retail vouchers last December boosted take-up among the company’s 11,000 employees to more than 25%, with staff enjoying discounts of between 5%-10% on the product.

Salary deduction explained

  • Salary deduction is a cost-effective way of offering a wider benefits choice.
  • Employees must commit to the salary deduction arrangement for a full year in order for employers to secure the discounts.
  • Organisations often choose to offer non tax-efficient options through salary deduction where they have a restricted benefits budget. Many also typically have a large, desk-bound workforce to whom they can promote the scheme cost effectively

In the second feature of this three-part special report, Vicki Taylor looks at the Chancellor’s blow to home computing schemes in the March 2006 Budget

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With the rug having been dramatically pulled out from under the feet of employers offering Home Computing Initiatives (HCI) for employees and the large industry built around it, employers and providers are now wondering what steps they should take.

The changes to HCI, which became apparent on 22 March and were contained in the background notes accompanying the Budget, have sent shock waves through the industry and have even wrong-footed several of the government’s own departments which had HCI schemes in the pipeline.

A spokeswoman from the Department for Work and Pensions confirmed that it had recently put out a tender to providers for the implementation of its own HCI scheme.

She says the providers will now be contacted to say that its plans are “under review”. The Department of Trade and Industry also confirmed that it introduced its own scheme “a couple of weeks ago”.

So what now for employers which have recently introduced schemes for the first time or already have one in place?

Since the news broke, there has been considerable confusion about what the announcement actually means – particularly with respect to the 6 April deadline.

A spokesman for HM Revenue & Customs (HMRC) has, however, confirmed its position with the following statement: “If before 6 April 2006 an employee entered into an HCI scheme arrangement with their employer, under which the employer is committed to provide a computer to the employee, but for reasons beyond their control the employee cannot take physical possession of the computer until 6 April or later, HMRC accepts that the computer exemption will apply to the provision of that computer.”

Martin Prescott, managing director at HCI provider RedPC, says: “Our message to employers is to get as many people signed up as you possibly can [before 6 April], because the benefit won’t be there any longer.” Prescott adds that he experienced a surge in orders within days of the Budget announcement being made.

Dan Pattemore, customer services manager at HCI scheme provider OnecallPC, agrees. “We are going to send a letter [to employers with schemes] saying that if [employees] don’t sign the hire agreement by 6 April they will never be able to take up this offer again.”

However, Prescott adds that employers which do not have a pre-existing scheme or their own credit licence, had probably missed the boat.

He says the Office of Fair Trading (OFT) telephoned providers after the news emerged to say that it had been told to suspend any action on HCI group licences. To run a HCI, each employer has to have an OFT Direction in place, which gives them authorisation to run the scheme.

“Unfortunately, because of the action of the OFT, there are not going to be any new schemes launching unless the company already has an OFT Direction or, of course, has it’s own consumer credit licence,” Prescott adds.

The OFT was unable to confirm that it had suspended new licences.

One employer that now plans to rush to sign up employees before 6 April is Darlington Borough Council. As the news about HCI broke it was preparing to offer employees access to its HCI scheme for the third time.

Ian Wilson, head of performance and development at the council, says: “We are just going to rush rapidly through [another offering] because we understand that as long as we get it signed, sealed and delivered by 6 April it will be okay.”

He says the eventual closure of the scheme, which has already been taken up by 270 of its 2,200 eligible employees, is a “bitter disappointment”.

An HM Treasury spokesman says the scheme had “served its purpose” and had led to a huge increase in the number of employees who are IT literate. He added that the scheme will now be reviewed to see how it can help those on low incomes, the unemployed and the elderly.

Wilson says that HCI had been reaching people on lower incomes.

“As a Local Authority, we have lots of people on lower salaries doing admin-type work or working in schools as dinner ladies. From our viewpoint [the removal of HCI] takes away the opportunity for people who wouldn’t [otherwise] be able to buy or acquire a computer,” adds Wilson.

Tarun Patel, compensation and benefits director at media firm MTV Networks Europe, is also disappointed the scheme has been withdrawn. MTV was planning to implement a scheme around 10 April and is now unsure whether to push ahead before.

“It is disappointing that the scheme is to be withdrawn from 6 April without any prior notice – not only to our organisation but to the many others that have invested their time and money with a view to offering this benefit to employees.”

It could, however, be the providers which have built up businesses around HCI schemes that have come off worst – feedback suggests that the smaller businesses will be hardest hit. Larger providers, such as RedPC which has around 25 employees, and Future Media which has around 70 staff who concentrate on HCI, are more likely to be able to weather the storm and avoid redundancies. Both companies claim redundancies are not necessary at this point.

Rob Howes, owner-manager of BizzApp, which provides a HCI implementation tool, estimates that the jobs of up to 3,000 people working directly for HCI-only providers were on the line. This does not include the other jobs that could also be affected such as those of distributors.

Howes says he stands to lose half a million pounds that he had invested in his business, and has already changed his company website into a “save HCI” campaign.

Steven Briggs, owner-manger of Simply Home Computers, meanwhile, believes he will probably have to let both of his employees go. “I must legally consult with staff before I can make them redundant and yet the government has effectively made them redundant without [any] consultation.

“I haven’t had a wage for a year-and-a-half because I have been setting up this business. I’ve signed up seven customers in the last fortnight and all of their employees are now expecting a scheme,” he explains.

One thing is clear though, if HM Treasury thought it could bury its announcement and its head in the sand, it was sorely mistaken. The HCI industry is pulling together to appeal for the decision to be reversed or for the time before the initiative must end to be extended.

Darren Spence, marketing director at IT services company Bytes Technology Group, says: “We are [hoping] to get a short term objective to see if we can get the period [before HCI is axed] to something like six months. I doubt we are going to get this statement reversed completely, but we would like an amendment that says higher-rate taxpayers won’t get the exemption, but lower-rate tax payers will.”

The HCI Alliance, which is made up of industry leaders working together with UK government on HCI, has issued a statement urging the government to reconsider its Budget decision to abolish the tax exemptions on which HCI are based. It claims that more than 1,250 organisations implemented HCI last year.

It seems the issue could be on the debating table for some time to come

The tale end of home PC relief

HM Revenue & Customs (HMRC) has confirmed that home computing initiative (HCI) schemes will close to new members from 6 April 2006. It has also confirmed that employees who have signed a HCI agreement, but haven’t taken delivery of a PC before that date, will still be eligible for the tax relief. A spokesman for HMRC, says: “If you sign the agreement before the cut-off date it doesn’t matter if your computer is delivered in May, June, July, you are not affected by the new rules.”

He adds that people who are aggrieved with the new rules could “make a [representation] though their MP or write a letter to the Chancellor”.

The spokesman also stresses that the changes do not affect the tax treatment of computers provided to employees for business use.

Case study: Carphone Warehouse

In the final stages of its HCI launch, Carphone Warehouse and its 15,000 eligible staff are left in limbo.

Irfan Hamid, head of business development for the UK at the telecommunications firm, had been looking to launch an HCI scheme in the next few weeks.

“We are pretty gutted. We thought that this would be a great benefit for our employees. Something like the HCI scheme benefits people in the retail industry probably more than in many other industries [where pay is often higher].”

The company had already communicated that the scheme was due to be implemented to its 15,000 eligible staff, resulting in a large number of enquiries from those keen to take up the offer.

In the third feature of this three-part special report, Nick Golding looks at the things you should communicate to staff about salary sacrifice

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The financial advantages of a salary sacrifice scheme for both employers and employees have been well documented. Plans can often be slow to take off, however, with initially low take-up rates occurring due to poor communication.

But a slow response from staff may be the least of employers’ worries because failing to effectively communicate the complexities associated with salary sacrifice, means more serious consequences may be around the corner, including severely damaged relations between employers and staff.

Employees on the national minimum wage or those who plan to leave an organisation’s employment before repayments on a purchase are complete are particularly in need of careful communication. So to prevent a backlash from these groups, it is important that they are not misinformed.

Mike Ashton, senior consultant at Watson Wyatt, believes that employers must be strategic in their communication methods when it comes to such schemes. “Disappointing take-up rates of a scheme may not be down to the actual scheme, but down to the way it is being communicated to staff,” he says.

While many managers concentrate on producing posters, leaflets and other advertising campaigns, this often only skims the surface, so if employees are to fully understand the salary sacrifice scheme on offer, employers must first conduct detailed research into employees’ needs. “There is a need for employers to get to grips with staff. They must know their audience, and this may mean researching and targeting them by age or known needs, so the effort really occurs before the leaflets and posters are produced,” Ashton explains.

By taking time to communicate the complexities of a salary sacrifice scheme, employers can manage staff expectations and ensure that those who are in a precarious position know the implications of becoming involved in such an arrangement.

Malcolm Higgs, director of the leadership, change and HR school, and director of research at Henley Management College, believes that if employers do not adhere to this guidance they can severely damage relations between themselves and employees. “The obvious consequence of poor communication is that staff will find out the wrong way, for instance, if an employee decides to leave the company half way through a scheme and is suddenly responsible for the full cost of a computer. These situations can be avoided, but if they are not, they can damage both the credibility of the leadership and the internal reputation of the company.”

Paul Bartlett, head of product development for benefits at incentives specialist Grass Roots, encourages the use of IT to help employees understand the effects of a salary sacrifice scheme. “There are calculators that employers can put onto the company intranet, which allow individuals to log in to their specific details and calculate the cost of a scheme. From this, employees can clearly see how much a scheme will cost them and whether the cost will take them below national minimum wage levels.”

Other employers, however, choose to simply by-pass employees who are likely to fall foul of salary sacrifice grey areas. This can be done by not promoting the benefit to certain sections of the workforce, an approach which is mostly seen in industries with a high labour turnover.

In these cases, employers may look to avoid the admin hassle of encouraging employees to join a scheme if they are likely to leave or are unable to join. “It is not particularly common, but in some areas of retail, for instance, it does become a consideration,” explains Bartlett.

Yet Higgs disagrees with this approach, believing that alienating staff at the early stages of a communications campaign can store up problems for the future. “Rather than excluding chunks of the organisation, employers should treat the communication of salary sacrifice like a storyboard, explaining to all staff what the scheme is and who can take part, then if employees are eligible they can read on,” he explains.

Once those who cannot take part have been notified, employers can begin to work on effectively communicating to those who can. “The next stage of the process can then move to presentations and seminars. There is no point in wasting time and money on presentations for staff who have no interest,” Higgs explains.

So for staff to feel engaged they must be communicated to about a scheme, whether they can take part in it or not.

What is more, employees whose earnings are not high enough to take advantage of a salary sacrifice arrangement should know about the schemes that are available to higher earners to give them something to aim to for. “Not communicating to employees on the national minimum wage makes no sense, because if they manage to move above this wage [level] they will want to take advantage of the scheme but will know nothing about it,” Higgs says.

Employers can also make use of scheme providers by inviting them into the workplace to explain the implications of a scheme to employees. Steve Edgell, business development manager at Wheelies Direct, which provides a bike-to-work scheme, insists on face-to-face contact with employees and, where this is not possible, a helpline is set up to answer questions. “We spend a lot of time at the front-end of schemes. We arrange roadshows and set up in the front receptions of client’s offices to give advice to staff who are thinking of taking on a bike-to-work scheme,” he says.

Edgell finds that informal face-to-face meetings are more productive. Aside from road shows, these meetings extend to coffee mornings and workshops to help staff understand the nature of such schemes.

Although many employees are keen to simply learn about the savings they can make, he recommends employers discuss with staff how the salary sacrifice mechanism operates.

It is in the interest of both the employer and the provider to make sure messages are clear, because there are implications for both. “Staff are generally pre-occupied with the product when we discuss schemes, but we try to discuss potential problems, such as the implications of an employee leaving mid-way through a scheme,” Edgell explains.

Case study: Finnforest UK

When timber supplier Finnforest UK introduced a salary sacrifice arrangement for bikes in September 2005, it was aware of the importance of communication.

Sue Culverhouse, HR administrator, found that filtering information through line managers was the most effective communication process.

“Although leaflets were produced, we found that educating management at the very beginning on the implications of a salary sacrifice scheme, mainly focusing on who can take part and how much it costs [was most effective],” she explains.

Providers came in and set up stands so staff could also speak with them during breaks. And easy-to-read paperwork detailing the tax issues was produced for employees.

Even though other benefits had previously been offered through salary sacrifice, Culverhouse was reluctant to rely on employees to remember the rules, “We gave out leaflets as a back up really.”

Case study: Greene King

When brewery Greene King introduced a salary sacrifice arrangement last June, it found a diverse range of communications helped with its implementation.

Amanda Brakels, pay and benefits manager, says: “Because we have staff across the country, the best form of communication is to use a combination [of methods]. So we sent members of the HR team out to regional meetings, used posters, banners, roadshows and notes on pay slips.”

With a large percentage of Greene King’s employees being part-time bar staff – 15,000 of its 18,000 employees are pub based – a salary sacrifice scheme required clear communication.

Greene King decided not to promote the benefit to low-earning employees, and instead just advertised it to office-based staff and pub managers. “We simply did not promote it to [low-paid] employees, and if any of them came to us asking to take part, we would explain it was something for them to aim for,” she explains.