It’s the little things that matter most in life. And that’s especially true for employees, who are increasingly looking beyond their pay packet to other benefits they get working for your business.
Employee benefits range from pensions and healthcare to more quirky benefits that help reinforce the culture of your company. According to Glassdoor, 34% of employees say that perks are the most important consideration when accepting a job.
What are employee benefits?
The best definition of employee benefits is that they are extra incentives or compensation given by employers to staff in addition to their basic salary. Also known as benefits in kind, perks or fringe benefits, they range from flexible working hours and free food to pension schemes and company cars.
Benefits typically apply to all employees – regardless of position – though some kick in when an employee hits a milestone, such as being employed for a certain amount of time.
Some benefits are legal necessities. A workplace pension and holiday entitlement are legal obligations but even with these there are differences, such as the amount of paid holiday a company offers.
Employee benefits are trickier for small businesses. They often lack the budget and buying power of larger firms to secure great benefits. With some creative thought however, even the newest startup can offer appealing employee benefits without breaking the bank.
What are the advantages of offering employee benefits?
Employee benefits are good for businesses and staff. By making your business a more attractive place to work, they can be a key differentiator when hiring talented staff, especially if, as a startup, you can’t be as competitive on salary.
Benefits are attractive to some job seekers, allowing them to save on costs so they have more money in their take home pay. For some employees, a benefit that costs £1,000 may hold more appeal than simply putting the same amount into their pay packet.
Loyal staff benefit too. Benefits can reduce the number of days lost to sickness and reduce overall absenteeism while boosting morale. By showing you’ve invested in their future with healthcare and pensions, your workforce will reward you with more productivity.
Flexibility has become a key benefit for employees. The concept of a 9-5 working day is becoming outmoded for some business, with flexible working hours and work-at-home days offering a better work-life balance for staff.
What are the tax implications of employee benefits?
Some employee benefits are taxable. This means that employees will need to file a self-assessment form with HMRC each year, using a completed P11D form to calculate how much tax is owed on the benefit received.
In general, employees are taxed at their current tax rate for benefits. For example, if an employee is in the 20% tax bracket and they benefited from £500 of free gym membership each year, they’d need to pay £100 (20%) to HMRC as tax.
The good news for businesses is that some benefits, such as health insurance and pension plan costs, are legitimate business expenses that can lower your corporation tax liability. There are tax-efficient benefits too, such as childcare vouchers, health screening and cycle-to-work schemes that offer tax and NI savings for employees using the benefit. To qualify, employees will need to take the benefit as a salary sacrifice, where the benefit cost is deducted before tax and NI, essentially making the benefit tax free.
Types of employee benefits
The secret to getting the best from employee benefits is knowing which ones will have the most positive impact for your business. Rather than piling on lots of benefits, it’s worth picking a few and introducing them slowly to monitor costs and impact on employee satisfaction and productivity.
Benefits don’t have to be entirely serious, such as sick pay or private medical insurance. As a business, you can give any benefit you choose as long as it is properly accounted for and taxed. Taking an imaginative approach to benefits can instil a sense of fun and creativity in the workplace, such as these examples according to Glassdoor:
VisitBritain gives all its staff free tickets to West End shows, as well as arranging trips to other attractions across Britain.
JustEat gives all employees free food and drink every Friday, along with hiring an office DJ on Friday evenings for a social staff disco.
Brewdog offers employees paid puppy leave – a week of paid holiday to help settle in their new dogs.
Contractual sick pay benefits
Sick pay is divided into two parts – Statutory Sick Pay (SSP) which the business must legally pay to staff who are off work sick, and contractual sick pay which is any additional money paid to the employee. Contractual sick pay, which is sometimes called occupational sick pay, is optional but a prized benefit by staff.
Advantages – Sick staff struggling into work for fear of losing pay can lower morale and spread infection, reducing productivity as a result. Staff tend to feel valued if you pay contractual sick pay.
Disadvantages – Cost is the biggest issue with many startups unable to afford this benefit.
Private medical insurance
Employee healthcare is a popular benefit, with private medical insurance one of the most coveted by employees. One study found that just over 44% of SME staff value benefits that improve their well-being and look after their health. Private healthcare can be extended to close family members of employees and enables them to get private treatment if they become ill.
Advantages – Private healthcare can help unwell staff return to work more quickly, and it conveys a business that cares for its staff. Its popularity with employees makes it a useful retention and recruitment benefit.
Disadvantages – Private medical insurance (PMI) is expensive. While one third of SME staff would like PMI as a benefit, expect to pay between £200 and £1,500 per employee per year.
Group income protection benefits
Think of this as an extension to contractual sick pay. If an employee is injured or off work with a long-term illness it pays a regular monthly amount in addition to SSP.
Advantages – This provide financial security for employees, especially those with families or dependents.
Disadvantages – Income protection can be costly for a smaller business as you will need to keep paying other benefits, such as NI and pension contributions, while the employee is off work.
Death in service and critical illness cover benefits
These benefits provide an employee or their dependents with a payment if the employee dies or is unable to work due to illness. Life insurance usually provides a salary multiplier, such as three-times salary, paid to dependents or a nominated person in the event someone dies while employed. Critical illness cover provides a lump sum to an employee if they suffer a permanent disability or serious illness that prevents them working again.
Advantages – Holds appeal to staff with families to support. Critical illness pay-outs also remove employees from payroll, reducing long-terms costs and liabilities.
Disadvantages – Premiums can be based on a variety of factors, so some employees may be expensive to cover. Most premiums cover core conditions, but not all, so check before you sign your business up to critical illness cover insurance.
It’s a legal requirement to enrol staff into a workplace pension and the business will need to make contributions as well. Any employee aged between 22 and the state pension age and who earns at least £10,000 per year will need to be enrolled.
Advantages – Workplace pensions are rated highly by employees as it helps them save for retirement. Schemes are easy and free to implement. You can increase contributions above the minimum threshold, and it’s a tax effective way for staff to save as they can benefit from pension tax relief up to £40,000 in contributions each year.
Disadvantages – While schemes are free, employer contributions are currently 2% and will rise to 3% from April 2019, adding to your overall wage costs.
Childcare benefits mean parents can work more and keep their skills in the workplace. It helps reduce stress-related absenteeism caused by staff juggling childcare. Larger businesses may have on-site crèches, but smaller businesses can give childcare vouchers – a government-backed scheme that helps staff pay for nursery and school care.
Advantages – The benefits are tax free, resulting in a large saving on childcare costs for families. Parents can sacrifice £243 of their salary and get a tax-free amount in vouchers that can be used for afterschool clubs and nursery places. The scheme is free to sign up to and easy to administer.
Disadvantages – Childcare costs can be expensive and vouchers may not cover all childcare needs, leaving some parents to still face a struggle in finding childcare.
Flexible working benefits
Flexible working – such as different working hours and the ability to work from home – is a popular employee benefit. Technology makes it easy to remotely connect to the office, and using laptops means staff can be effective homeworkers.
Advantages – Helps staff achieve a better work-life balance and is useful for family emergencies.
Disadvantages – Flexible working can be open to abuse. It’s best to monitor staff and tackle excessive flexible working. Some employees without families can resent staff working from home, so be prepared to offer it to all your employees.
Food and drink benefits
Free food and drink items are always popular with employees. Cheap to implement, it’s a great benefit for startups. Coffee and water machines are fairly typical in most workplaces, but you can add in food perks such as free toast, fruit, breakfast and pizza.
Advantages – Employees love these low-cost benefits. According to a study by recruitment agency Reed, 40% of staff rated free tea and coffee as their most important perk.
Disadvantages – Keep tabs on how much you spend. If you spend more than £150 per employee per year, they could be liable for tax as free food is effectively a benefit in kind.
Gym membership benefits
Offering gym membership is a great way to keep staff fit and healthy. While larger firms can offer on-site gyms, smaller businesses can arrange corporate membership deals with local gyms offering subsidised access for employees.
Advantages – A healthy workforce is a productive workforce and gym membership can reduce the number of sick days.
Disadvantages – It can be expensive depending on the type of gym and the number of employees you have. It’s a benefit-in-kind and staff will have to pay tax on their gym membership.
Holiday trading benefits
Extra holiday is often welcomed by staff and you can simply award additional holiday as you like. Holiday trading means staff can buy additional days, usually for around 1/260th of their annual salary or sell back time to the company in exchange for extra income.
Advantages – Provides employees flexibility and, as the 1/260th cost is paid over the year from salary, it has some tax and NI advantages.
Disadvantages – Unsurprisingly, most employees prefer to buy extra holiday which can have a knock-on effect on staff cover and productivity. Ensure there is a cap on the amount employees can buy.
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