Our employer’s guide to pay and benefits provides an overview of employee benefits. We will look at the way in which economic, legal and social factors have influenced employee benefits since they were first introduced after World War II. In addition, we also consider current trends, including the emerging popularity of flexible benefits which are designed to provide employees with individual choice. Keep reading and we will guide you through the 6 steps to introducing a new benefits package.
What is meant by ‘employee benefits’?
The CIPD defines employee benefits as ‘non-cash provisions within the reward package, although they can have a financial cost for employers, for example paid holidays, pensions, or company cars’. While some employee benefits are a legal requirement, many employers choose to offer an enhanced benefits package as a way of attracting, retaining and engaging talented people. A well thought out rewards package will also ‘contribute towards improving wellbeing, and encourage required behaviours, achievements, values, and skills’.
History of employee benefits
The welfare state was created after World War II introducing protection for the general population, including benefits such as sick pay and pension schemes. Many organisations chose to offer additional benefits over and above their legal obligations.
During the 1970s, businesses attempted to avoid taxation by offering generous employee benefits as an alternative to high salaries. By the late 1980s tax rules had become stricter, meaning employee benefits no longer attracted the same preferential tax treatment. However, by this stage, people had become accustomed to receiving employee benefits and the practice has continued.
Trending employee benefits
As the CIPD says ‘the prevailing financial, legal, and social background… plays a role in the development and shaping of benefit policies and practices’. We can clearly see how current trends in employee benefits have been influenced by these factors.
For example, the Covid-19 pandemic raised awareness of employee health and well-being and employers’ role in supporting employees. As a result, over the last couple of years, there has been an increased focus on benefits relating to physical and mental well-being. We have also seen a significant increase in flexible working arrangements, particularly home working and hybrid working, with 85% of organisations providing flexible working to some or all employees. The CIPD reports that company sick pay provisions have become more generous due to the pandemic, although it is yet to be seen whether this will continue long term.
The current labour market shortages (caused by a combination of factors, including Brexit and the pandemic) have resulted in some employers offering improved rewards packages to attract candidates. This is particularly so in the retail, hospitality, catering, leisure and cleaning industries, which have been hit the hardest by labour shortages.
The current cost of living crisis will likely bring an increased focus on financial well-being. In a survey by the CIPD, one in four employees said that money worries impact their ability to do their job, citing lost sleep, health problems, difficulty concentrating and/or making decisions and spending time at work dealing with money problems. Despite this, only 18% of organisations have a financial wellbeing policy. Likely, employee benefits that support financial well-being (such as debt/financial advice, income protection etc.) will be highly desirable.
We’ve also seen an emerging trend towards individualisation, i.e. where companies offer flexible benefits to suit the employee and their circumstances as opposed to fixed benefits provided to all employees. We discuss flexible benefits in more detail later in this guide.
Statutory employee benefits
Organisations are legally required to provide the following benefits for all employees:
- 28 days annual leave (inclusive of bank holidays)
- Workplace pension contributions of 3% of earnings
- Statutory sick pay
- Family related leave and pay, including maternity, paternity, adoption, shared parental, parental, antenatal care, parental bereavement leave and unpaid dependents emergency leave
- Time off work for jury service
Common employee benefits
The annual CIPD reward management survey identified many employees benefits employers offer: training/development: financial support for training/qualifications; development opportunities; study leave; conference attendance; professional subscription and fees; apprenticeships; mentor programmes; and recognition programmes.
Enhanced leave entitlements: maternity/paternity/adoption leave and pay; annual leave; unlimited annual leave; bereavement leave; carers leave; career break; and the option to buy or sell annual leave.
Financial well-being: pension scheme; company car / allowance; enhanced redundancy pay; life assurance; occupational sick pay; income protection; debt counselling; financial advice; subsidised canteens; retailer discounts; travel season ticket; and hardship loans.
Health & well-being: employee assistance programme; eye care vouchers; flu vaccinations; cycle to work scheme; private medical insurance; dental insurance; health screening; and gym membership.
Family: flexible working arrangements; four day working week; and childcare vouchers.
Social: Christmas party; social events; and sports clubs.
While some benefits may be given to all employees (such as pension contributions or company sick pay), other benefits may be offered to employees based on job grade, type of job role and job location (such as private medical insurance).
The tax implications of employee benefits
Most employee benefits are subject to income tax. There are a small number of tax-free benefits, including canteen meals, on-site parking, a Christmas party and a mobile phone. Some benefits are eligible for preferential tax treatment. These are known as salary sacrifice schemes and include pension contributions, cycle to work schemes and childcare vouchers. The government introduced salary sacrifice schemes to encourage desired behaviours, such as saving for retirement.
Under a salary sacrifice scheme, the employee agrees to a reduction in their salary and in return the employer provides a benefit. The employee therefore pays less income tax as they earn less, and national insurance contributions are reduced for both the employer and employee.
Further information on tax implications is available at gov.uk.
Flexible Benefits
In line with the recent trend towards individualisation, an increasing number of organisations are now offering flexible benefits plans which enable employees to select which benefits they prefer. The employer provides a range of different benefits which the employee can choose from. A CIPD survey found that 25% of organisations offer employees either total choice or limited choice of the benefits they receive, with a further 16% of organisations intending to introduce flexibility later this year.
The benefits of a flexible plan are that employees are more likely to value their benefits package, as they choose benefits to suit their circumstances and lifestyle. A flexible plan is, therefore, more likely to be successful in attracting, retaining and engaging employees. It also means that employers aren’t wasting money on benefits that employees don’t value or utilise.
Furthermore, flexible plans can assist with harmonising benefits following a merger. As Gemma Bullivant, HR Coach and Consultant, says: ‘It has never been more relevant or important to establish a curated employee-led approach to benefits – a way to enable flexibility and choice to employees to ensure what is on offer is of personal value’. Nevertheless, there is undoubtedly increased complexity and administration associated with flexible plans.
There is a range of different ways a flexible benefits plan can operate. For example, some employers will allocate the employee a specific amount to spend on benefits. In contrast, other employers may give the employee the option of reducing or increasing their salary to purchase benefits. Similarly, some employers offer a fully flexible benefits package where all benefits are optional. Other employers have a core set of benefits that all employees receive (such as pension contributions and annual leave entitlement), with a separate group of optional benefits that employees can choose from.
6 steps to introducing a new benefits plan
Before introducing a new benefits plan, you should carefully consider the following:
1. Evaluate the benefits you currently offer
The first step is to evaluate the current benefits you offer. Speak to your employees to understand whether the current benefits meet their needs, and if not, what would be more beneficial? This could be via an informal conversation, a staff survey or focus groups. The take-up rates (i.e. what percentage of employees are accessing the benefit) should be reviewed and compared with industry standards. Popular benefits can be retained in the new benefits plan, while unpopular benefits can be discounted.
Employers would also be wise to check employees’ level of knowledge about current benefits, in case there is a lack of understanding. Similarly, employers should consider whether potential job applicants are aware of the benefits offered, i.e. do job adverts specify the benefits package?
2. Decide whether to offer a flexible benefits plan
To decide whether to offer a flexible or fixed benefits plan (or a combination of them both), you should consider whether the additional complexity and administration is outweighed by the benefits of offering choice.
You may wish to review the current labour market for your industry and how their benefits package compares with competitors. If attracting and retaining good people is challenging, offering an attractive benefits package will likely help. One way of achieving this without incurring significant extra costs is to offer flexible benefits.
3. Select which benefits to offer
While employers should undoubtedly offer benefits that will be popular with their people, employers should also carefully consider how the benefits offered will support their organisational goals and encourage desired behaviours. For example, offering financial support for training and qualifications is likely to contribute towards an organisational goal of developing a highly skilled workforce. If an organisation is experiencing high levels of absence due to mental health issues, then investing in benefits to support health & well-being (such as an employee assistance programme) may be beneficial.
Benefits can also be used as a way of attracting certain sections of the labour market. Offering flexible working arrangements and enhanced leave entitlements is likely to attract parents and carers who are looking for work that will fit around childcare arrangements or caring responsibilities.
Employers should also consider the impact of generational differences, and ensure that the benefits offered are of interest and value to employees at all stages of their life and with varying personal circumstances. Similarly, employers should ensure that home workers and hybrid workers are not discriminated against in the provision of benefits, for example if the benefits are geographically limited (local gym membership or on site nursery provision).
The CIPD recommends selecting a relatively small number of benefits to offer employees, as too much choice can make it harder for employees to make decisions, and can add unnecessary complexity. A small number of genuinely valuable benefits will make far more of a difference than a wide range of benefits that aren’t tailored to suit the needs of employees.
4. Promote the benefits plan
Arguably the most important step of introducing a new benefits plan, is communicating it effectively to employees so that they are aware of what they are entitled to. A recent YouGov survey found that just 57% of employees said that their employer had explained the benefits they offer.
A launch event is a great way of announcing the new benefits plan, but employers also need to promote the scheme on an ongoing basis to maintain interest and participation. Employees should be made aware of the benefits that are offered, and any tax implications that could affect them. Tools such as newsletters, the intranet, information sheets, posters, screensavers and emails can be really beneficial, particularly if they are used regularly. For example, the company newsletter could have a monthly employee benefits feature. IT support may be needed to ensure that the benefits are accessible to all employees.
Employers should also consider how to promote the new benefits to potential job candidates. For example, job adverts and the careers page on the company website should be updated.
5. Explain the tax implications
The tax position of an employee benefits package can vary considerably depending on the benefits offered. While some benefits may be tax exempt via salary sacrifice (childcare vouchers and cycle to work scheme), most benefits will be taxable. The tax implications should be explained to employees; colour coding is a useful visual way of showing which benefits are taxable. Employees should also be encouraged to see advice from the HMRC or a financial advisor.
6. Review the benefits plan
It is important to regularly review a benefits plan to ensure it continues to meet the needs of employees and the organisation. The take up rate is the most common way of evaluating success. While data can provide important insights into the success of each benefit, qualitative feedback from employees is invaluable.
What can we do to help?
If you would like advice on employee benefits, please contact our team on 0330 223 5253 or office@fitzgeraldhr.co.uk. We would be delighted to help you.
We hope you found this guide useful. You may also find the resources below helpful.
