Retaining good quality employees can be difficult, for years larger employers have been doing this by providing their employees with perks or benefits. Smaller employers are starting to join in and are looking into providing benefits to employees but can be concerned about the extra red tape, as well as having to consider not only the cost of the benefit but the cost of administering that benefit.
Two of the benefits that are becoming more common with employers who have a smaller number of employees are private medical insurance and cycle to work schemes. There are now a number of providers who cater for or specialise in the Micro and SME market and many of these offer much more competitive rates than an employee can get independently.
These benefits are very different in the way they are provided to employees. Private Medical Insurance is paid for by the employer but is subject to tax (and class 1A National Insurance) and has to be reported to HMRC. Cycle to work is paid for by the employee but can save both the employee and employer money.
Private medical insurance
As mentioned, this is taxable so doesn’t that mean that you will have to report it to the tax man on a P11D and won’t the employee get a bill when they do their self-assessment tax return? Well Yes, and No it doesn’t have to be.
From the 6th April 2016 ‘Payrolling Benefits’ was introduced. This means that the value of the benefit received can be taxed in real time removing the requirement to report the benefit on each employee’s P11D, thereby saving your business time and money by not needing the staff to process the P11D’s inhouse or not using your accountant/payroll provider to process these for you. There is still a need to report the total value of the payrolled benefit on the P11D(b) for Class1A NI purposes, but this is by far less time consuming than generating multiple P11D’s. The other benefit of payrolling benefits is that employees pay the tax on the benefit while they are receiving it and don’t have to pay a tax bill when they complete their tax return 10 months after the end of the tax year.
If you are planning on Payrolling Benefits, then you will need register with HMRC prior to the start of the tax year through your Government Gateway and speak with your payroll provider to ensure that all elements are set up correctly. If you miss the registration deadline it does not mean that you are unable to payroll benefits, this just needs to be done informally you will need to write to the Complex Caseworker Team at HMRC and a P11D must still be completed.
Once you are registered for payrolling a specific benefit with HMRC then this registration carries forward to the future years for that benefit. Most payroll software and payroll providers should be able to set you up for payrolling benefits on their applications without any difficulty.
We are talking about private medical insurance here, but it is possible to payroll all taxable benefits with the exception of employer provided living accommodation and interest free/low interest (beneficial) loans. These benefits must still be reported on a P11D.
If you do choose to payroll benefits you do not have to payroll everything that can be payrolled, for example many businesses start with private medical insurance as this impacts the majority of their employees and then move onto company cars the following year once they are comfortable with the set up, each benefit must be registered for payrolling separately.
Cycle to Work
Cycle to Work is usually operated as a salary sacrifice whereby an employee agrees to reduce their contractual salary by a certain amount per month over a fixed period of time, typically 12, 18 or 24 months, though sometimes as many as 60 months in exchange for hire of a bike, at the end of the term of the hire the bike is then transferred to the employee, often for a nominal transfer fee of £1. The employee saves both tax and national insurance and the employer makes a national insurance saving as well.
What can you save? If you had a basic rate (20%) taxpayer then on a £1,000 bike over 12 months they would save £320 in tax and national insurance, a 40% taxpayer would save £420 in tax and national insurance. In both cases as an employer, you would save £138 in employers national insurance, and running the scheme would usually cost you nothing more than a little admin time to set the deduction up on the payroll.
As Cycle to Work is a salary sacrifice scheme there are a few of things that both the employer and employee need to be aware of before signing up to the scheme.
- Salary sacrifice reduces an employee’s contractual salary and can not take an employee below the national minimum wage.
- A reduction in salary could impact other benefit entitlement such as statutory maternity pay or state pension.
- As a salary sacrifice is a contractual reduction it could impact mortgage applications.
These are just two of the benefits you could offer your employees, but in an ever-competitive recruitment and retention market employers need to stand out from the crowd in order to attract the best talent and providing benefits to employees is one way to do this.