Employee benefits are an excellent way of attracting talent, retaining staff and improving general wellbeing in the workplace. But what are the rules and regulations in place around them?
What are employee benefits?
Employee benefits are incentives offered by companies. In most cases, the benefit itself comes at the cost of the employer, either wholly or partially.
The reasons for offering employee benefits are numerous. Generally, they are used as a means of looking to entice new talent to join a company, retaining existing team members and boosting wellbeing or morale in the workforce.
What are the types of employee benefits?
The types of benefits offered to employees vary from one company to another. They are also often dependent on an employee’s status within a company, as well as the geographical location of the employer or employee.
Benefits can usually be listed under four different categories - core; optional; annual events and trivial.
1. Core employee benefits
There are certain employee benefits that employers have to provide due to legislation or contractual obligation. These are referred to as core benefits and include things such as pension schemes and flexible working. This also includes any other benefits that make up an employee’s core remuneration package and so the employer would usually shoulder the entire cost of the benefit.
Here are some examples of core benefits:
💵 Pensions - Because of legal changes that have been made over the last few years, companies are now required to offer a workplace pension scheme to all eligible employees.
🏖 Holiday & time off - Employers are required to offer a certain amount of paid annual leave to all employees. Typically, employers offer more than the legal minimum as a means of attracting candidates and providing rewarding employees. A significant number of companies also provide incremental increases related to employee loyalty.
There are also statutory requirements related to other forms of leave, including maternity, paternity, adoption, parental and bereavement leave. Like with holidays, many companies offer more than just the legal minimum.
🏡 Flexible working - Any employee can ask for flexible working, and all employers have to consider the request. They are fully entitled to reject it, but in doing so, they must provide a valid business reason.
A common example of when an employee may ask for flexible working is if they have a young child who requires care, or if they're looking after a poorly relative who may also need additional support.
2. Optional employee benefits
Optional benefits are benefits that an employer is not obliged to provide but does so out of goodwill. The employees will usually be able to “opt-in” to any chosen benefits, and these can include things such as private medical insurance (PMI) and additional health or wellbeing benefits - e.g. eye care, meal vouchers, loans and company cars. Sometimes, the employee may have to contribute towards the benefit, e.g. the cost of adding a dependant to their PMI plan.
👩⚕️ Healthcare - A lot of companies offer healthcare benefits to their employees. Healthcare benefits cover a wide-ranging list of benefits, including:
- Eye care vouchers
- Private medical insurance
- Gym membership
- Dental insurance
These benefits are often highly-valued by employees as they provide a tangible cost-saving and also offer flexibility for employees to increase and decrease the level of cover they require.
🚙 Company cars & car allowances - Organisations will sometimes provide company cars to their employees if the individual requires the use of a vehicle on a day-to-day basis. HMRC then taxes these vehicles according to their CO2 emissions.
Employers can sometimes prefer to provide a cash allowance to employees if they decide to use their own vehicle instead of providing them with a company car.
3. Annual events
🎪 Annual events are also considered to be employee benefits. Parties and other annual events will typically fall under this criteria if they occur only once a year. The events are non-taxable up to a threshold of £150 per head, per year, and would not need to be reported.
🎄 Christmas parties - Employers may choose to throw their employees a Christmas party each year. Provided that all the employees are invited, and the cost per head doesn’t take them over the annual threshold of £150, then it will remain tax-free.
4. Trivial benefits
Trivial benefits include any benefits that are under £50 that are not cash or cash vouchers, not part of a contractual agreement and not a reward for performance.
📽 Cinema tickets & vouchers - Employers may offer their employees cinema tickets or tickets to concerts and sporting events as a gift for a special occasion, such as birthdays or anniversaries. These must always be below £50, and they cannot be exchanged for cash.
📈 Reporting and tax obligations
Like all aspects of payroll, certain benefits have reporting and tax requirements. So, when choosing what benefits to offer, employers must understand what does and does not need to be reported to HMRC.
It is also important that they understand and communicate to their employees the impact of any benefits they receive, and how it may attract income tax.
Some benefits that are not subject to tax or NI, such as employee relocation (up to £8,000) or specific work-related training, have no reporting obligations.
🚴♀️ Taxing benefits & salary sacrifice
There are certain types of employee benefits that offer preferential tax treatments. These usually involve benefits which encourage healthier lifestyles choices - e.g. cycle-to-work schemes.
Salary sacrifice allows for an employee to give up part of their gross salary, while the employer provides a benefit in return. An example of this would be a pension salary sacrifice scheme. In this case, an employee would voluntarily sacrifice part of their salary, and the employer would then provide the equivalent contribution to the pension.
Under this scheme, the employee would save on income tax while the employee and employer would both make a saving on National Insurance contributions (NICs).
However, it is important that before agreeing to any salary sacrifice, that employers are aware that a salary sacrifice scheme is included in the calculation for both National Minimum Wage (NMW) or National Living Wage (NLW). The result could mean that an employee’s earnings fall below the NMW or NLW threshold.
From April 2020, HMRC will not fine or sanction employers who allow employees to fall below the minimum wage as a result of salary sacrifice arrangements, provided they meet five conditions. Nevertheless, employers will still be responsible for topping up the salaries of employees who do fall below NMW or NLW.
👉 Benefits & PayFit
At PayFit, we offer employers the opportunity to record a variety of employee benefits from contractual annual leave to company cars. PayFit treats each benefit in accordance with the HMRC regulations around reporting, tax and NIC implications.
PayFit also offers employers the flexibility on choosing how they wish to report these benefits, whether it be through payroll, i.e. payrolling benefits, or reported via P11D submissions.
Payrolling benefits on the PayFit app is also very straightforward. All that is required is for the toggle to be activated. Once this has been done, the benefits can be added on the app and payroll.
Keen to find out how PayFit can help simplify your payroll and HR processes? Then why not book a demo with one of our product specialists?
PayFit blog author