Providing a range of employee benefits helps differentiate your business from your competitors. Deliver these benefits via salary sacrifice and you’ll gain an additional advantage by making tax savings. But salary sacrifice schemes are not straight forward, and recent changes to legislation mean you’ll need to make amends to the way you operate existing schemes. Whether you’ve got salary sacrifice arrangements in place, or you’re thinking of setting them up, this article outlines how salary sacrifice works, the pros and cons of this approach and details the changes you need to know about.
What is Salary Sacrifice and How Does It Work?
Salary sacrifice is a legal way for employers to provide benefits to employees so that both parties make tax savings. By deducting the cost for benefits from gross pay, both employer and employee benefit by paying tax on the remaining, lower salary.
Depending on how a salary sacrifice scheme is implemented, simply or SMART, either the employee saves on tax and NICs (National Insurance Contributions) or they gain a higher value of benefit than their contribution. With either approach, employers save their NICs on the proportion of the salary being sacrificed.
The table below shows the savings employees on differing tax rates would make if they exchanged £100 of their salary for certain benefits.
Is Everyone a Winner?
There are many positive reasons to provide benefits in this way.
• The obvious benefit of tax savings
Despite changes to tax legislation in this area (more on this in a moment), there are still tax savings to be made for both employers and employees on some benefits. These savings can make a big difference in terms of helping lower paid employees gain access to benefits they could not otherwise afford.
• Enhancing your total reward package
The more cost-effective benefit provision is, the more benefits you can afford to offer and the more attractive and competitive your reward offering becomes.
As a business owner, you can decide what to do with any employer NIC savings; put them back into the business or share them with employees. Some organisations use some or all of their employer NIC savings to make additional pension contributions or fund an additional low-cost benefit, such as a health cash plan. This enhances their employer proposition and makes existing employees even happier.
• Keeping your high earners happy
If your business has any high earners, their £11,000 personal tax allowance reduces by £1 for every £2 earned over £100,000. Using salary sacrifice reduces their gross earnings; bring their earnings below £100,000, and their personal allowance will be preserved boosting their tax- free income.
The Drawbacks to Salary Sacrifice
While the tax savings and ability to offer a range of attractive benefits is tempting, salary sacrifice has it downsides.
• It’s not straight forward
Operating a salary sacrifice scheme requires a specialist tax knowledge to set the schemes up correctly and to provide the right employee guidance. Administration of benefits, including real-time tax reporting, also needs to be on point to remain on the right side of the law. One way around these issues is to work with a HR consultant to set up a scheme underpinned by the effective processes.
• Business risk
Some salary sacrifice schemes entail a degree of financial risk for the business (such as Cycle to Work), where the employer pays for the cost of the benefit up front and the employee makes repayments via payroll. If record-keeping falls down, or a leaver’s final pay cheque does not cover the outstanding cost, you’ll be liable for the expense.
• Not everyone can participate
Where a salary sacrifice arrangement would reduce an employee’s gross salary below the national living wage they will not be able to participate in the scheme which can be divisive. Inadvertently take an individual’s pay below the living wage and you’ll need to pay the staff the shortfall in wages and you may incur up to £20,000 in HMRC penalties per employee.
• It’s not always beneficial for employees to reduce their gross earnings
Lower paid employees may find their ability to claim certain means-tested benefits, such as jobseekers allowance or statutory maternity pay, is impacted. That’s because their NICs will have reduced and they may not meet the earnings threshold to qualify for these benefits should they need them in future. Other financial arrangements such as applying for a mortgage can also be affected by reducing gross earnings via salary sacrifice.
Which Benefits Can You Provide via Salary Sacrifice?
Recent legal changes surrounding salary sacrifice mean that not all benefits will continue to attract the same levels of tax savings. From April 2017 onwards, salary sacrifice will continue to operate as normal (attracting employer and employee NIC savings and employee tax savings) for the following benefits:
• pension savings (and related advice)
• childcare provision (including employer-provided childcare and childcare vouchers)
• cycle-to-work schemes
• ultra-low emission cars (CO2 emissions under 75g/km)
However, the benefits listed below can no longer be offered in this way and will only attract NIC savings for the employee:
• company cars (CO2 emissions of 75g/km and above)
• work-related training
• car parking near your workplace
• health screening checks
• mobile phones and computers
• gym memberships
• school fees
This means, if you offer any of the benefits above and retain the employer NIC proportion of your saving, this will now be a cost to the business.
Transitioning to the New Arrangements
The good news is that schemes in place before April 2017 are protected until April 2018. Arrangements for benefits in the second group above will be protected for three years until April 2021. But beware: if you renegotiate your contract before these dates, you’ll need to adopt the new tax legislation from the effective date of your new contract.
If you need specialist HR support to review your position and manage any changes, get in touch by calling us on 0330 555 1139 or via email at email@example.com.
Recruitment for agencies means delivering quality work for clients that relies on having the right individuals, with the right skills, in the right place at the right time. But as the employment market is increasingly candidate-driven, it’s becoming more difficult to hire quality people. Add to this the need to be able to hire quickly and retain flexibility and you have the perfect storm. This agency recruitment guide outlines how to win the war for talent and keep delighting your clients.
Know Where Your Agency’s Headed
If your agency is planning on significant growth, recruitment will be one of your top priorities. You’ll need to establish the type and volume of work you plan to secure and build your team around it. But, as you well know, pitching for work isn’t the same as securing it, so position your business to be able to react as work is confirmed. Particular skill sets, such as SEM and social media management, are in demand, so plan ahead to secure these roles.
Establish Current Capacity
Before recruiting for a role, make sure you really need it by establishing your team’s current capacity and how your billable rate is being spent. This isn’t about checking up on people; understand work volumes by looking at time-sheets or online time tracking systems.
Cross-reference this data with an internal skills audit to identify any expertise your team has that could be better used. Re-allocating administrative work or re-designing job roles could free up valuable resources and expertise. Plus, hiring an administrator is generally more cost-effective than paying for a technical or specialist role. If this sounds too complicated or time-consuming, consider hiring an HR consultant to help you carry out the work.
Redesign Roles or Promote from Within
If it’s a more senior role you need, it’s good practise to promote internally. One of the main reasons that people leave agencies is the lack (actual or perceived) of career progression. This ‘promote from within’ approach will also send a positive message when hiring to backfill the vacant post.
Sometimes, an external hire could be a better choice, particularly if no-one on your existing team is ready to step up or you want to bring in a fresh pair of eyes. However you fill the role, you’ll still need to conduct a transparent and fair recruitment process to give everyone the opportunity to apply and be considered.
A Stitch in Time…
Taking the time to write a quality job description and person specification are the foundations of quality recruitment. By accurately setting out the job and skill requirements, you’ll attract the right candidates and have the basis for your interview questions. Work with an HR consultant to ensure you tick all the necessary legal boxes too.
Get the Price Right
With the continuing war for talent in the creative agency sector, proposing the right salary is key to attracting and engaging the best people. Recruit using an HR consultant and you’ll control costs by using their knowledge of market rates to ensure you don’t overpay.
Don’t Underestimate the Importance of Culture
If you’re recruiting from the Gen Y or millennial populations, and there’s a very good chance you will be, you need to emphasise more than job role and pay. Promoting benefits, perks and other advantages, such as career development and corporate social responsibility will attract quality candidates from these social groups.
Consider what makes working for you special and communicate it in your recruitment literature or at interview. Do you have regular team lunches or nights out, gifts at Christmas, healthy snacks in the office, flexible working or family-friendly offerings? If you’re struggling to entice quality candidates, partner with a Human Resources specialist to improve your offering and make you an employer of choice.
Recruitment for Agencies on the Right Contract
If you do need a last-minute hire or a temporary solution to meet an uptake in work, fixed term or freelance contracts are a good, low-risk stop-gap. Should the work keep pouring in (and you hired well), you can always ask your temp to become permanent.
It’s Not What You Know…
…it’s who you know, particularly when it comes to recruitment for agencies. Research shows that a lot of agency hires are found through personal and professional networks with LinkedIn the leader in the on-line arena. Using your contacts is a great way to meet and keep a range of suitable candidates warm for speculative roles and leaves you well-positioned when you need to be able to make an offer quickly.
Be Prepared to Deal with Counter Offers
With stiff competition for talented people, don’t be surprised if you make an offer only for the individual to receive a counteroffer from their current employer. You’ll need to have a strategy in mind with a top figure you won’t go beyond. Combine your pay offer with strong messaging about the value of the total package and emphasise cultural fit to differentiate your company from the competition.
Follow this recruitment for agencies guidance to ensure you only recruit when you need to and that, when you do, you get the best person for the job at the right rate.
If you need pragmatic recruitment support for your agency, get in touch by calling us on 0330 555 1139 or via email at firstname.lastname@example.org.
Expanding your business is a great feeling, but more people means more people management and less time for everything else. Which is why many small businesses often choose to work with an HR provider. But getting the right service for the right price is critical. If you’re thinking of hiring an HR provider, make sure you avoid these five common threats.
1. Pressure Sales Tactics
Choosing your HR provider in response to an emergency situation is a natural reaction. But it makes you a perfect target for the pressure sales tactics used by some HR suppliers. With your eyes on your people problem and not the small print, you could end up in a long-term contract you simply don’t need. Try to cancel and you might find yourself trapped by a six-month notice period. Hardly the flexible approach your business needs.
One way round this is to work with an independent HR consultant. You’ll only pay for the service you need when you need it. And most independents won’t tie you into needless long-term contracts or catch you out with automatic renewals.
2. One Size Fits All Provision
Your business is not the same as any other. You have your own challenges, culture and way of doing things. Despite their best assurances, larger HR consultancies rely on standard processes, procedures and text book answers for their scaled-up business to be profitable.
When you’ve got an HR issue, you need someone to tell you what you can do, not what you can’t. Free from a constraining company rule book, independent HR specialists build an in-depth knowledge of your business to provide bespoke solutions. And, because they’re business owners, they combine legal advice with a keen eye on any commercial implications.
3. Call Centre Style Service
The call centre model might be fine for your mobile phone company, but employment services are delivered best face to face, not on the end of the phone. Like many call centres, large HR providers can have high turnover which leaves you explaining the same problem to different people (once you finally get through).
Using an independent HR consultant means developing a real relationship and a deep understanding of your business culture and the challenges you face. When jobs are best done in person, such as at times of change or crisis, an independent HR provider will stand shoulder to shoulder with you or your managers, to deliver the best results.
4. Sky-High Rates That Cover More Than Your Package
Larger HR consultancies may have lots of white papers and lovely offices but it’s the expensive rates and long-term contracts you pay for that cover them. Depending who you deal with, some larger consultancies take a tiered approach to their contracts with smaller organisations taking a back seat to larger companies.
Independent consultants have significantly lower overheads and will provide you with a price based solely on the service you require. They won’t tie you into long term contracts; you just pay for what you need, when you need it. There are countless examples of some of the larger companies automatically renewing contracts for five years, or even longer, meaning you could be liable for thousands just because you forget the renewal date!
5. Hidden Agendas For The HR Provider
It’s not just automatically renewing contracts that larger consultancies want to push you into. They often try to sell you their software and systems too. Not only are these expensive and possibly not required, but they make it harder for you to step away from the support required to run them. Changing systems is a tricky process that no organisation wants to do too often.
Choose to work with an independent consultant and you’ll find they know their area of expertise is HR and they stick to it. You won’t be tied in by IT systems making it easy for you to use and pay for your consultant only when you need them. Most independents prefer to work with happy customers who choose to be with them and not clients who stay because they have no choice.
Many small businesses are lured into working with big HR companies because of the promise of insurance that offers a level of free legal support should a claim go to tribunal. It’s important to note that if situations are managed properly, they shouldn’t get anywhere near a tribunal, making this insurance almost worthless. Also, watch out for legal costs. Once the free cover is used up (which won’t take long) many providers charge a premium for legal support, way above market rates.
From one Small Business to Another
Working with like-minded people often gives the best results. After all, part of the joy of running your own business is that you get to choose who you work with and that should include your HR provider. If you want hands-on, cost-effective HR support, get in touch by calling us on 0330 555 1139 or via email at email@example.com.