How can enhancing employee reward free up funds to support future growth?

Getting reward right is complicated. All individuals, employees, HR, Finance, Tax and other professionals have their own views and what may work for some may not be viewed as attractive by others.

This article looks at what organisations can do to give them:

  1. An edge at recruiting and retaining key talent by looking at reward strategy;
  2. Cost savings - how enhancing reward could be achieved by reducing costs, not increasing them; and
  3. Higher Employee Net Pay – utilising compliant arrangements to improve net pay at a time when it may be difficult to give pay rises and to compensate employees for rising inflation.

Why looking at Reward is important

As the war for talent has intensified and organisations try and return to “normal” with the Covid legal restrictions easing in the UK, making the most out of reward but also balancing costs has become a key area to explore to help business growth and also help recruit and retain the best available.

The war for talent has intensified due to recruitment being less about regional or local barriers – more organisations are taking a national or international approach to recruitment, adding to competition and eroding regional pay gaps with pay levels generally being re-assessed. However, it isn’t just about cash. Having clear values and an attractive work culture mean more than ever before, particularly with greater hybrid working – getting a community feel requires more attention than perhaps it did when everyone worked similar hours in the same location.

Therefore, looking at Total Reward Packages is important, as is considering this alongside training, travel and expense policies – these are all considered when employees are looking to move jobs – it isn’t just about a pay rise and the short term – individuals want to be at an organisation where they can see a future and play a role in that success, as well as be rewarded for it.

Getting to the point, what can be done with Reward to help reduce costs to fund growth?

There are many options here and we outline these by looking at the key areas below. Some will depend on the type of organisation it is, its culture and also how it interacts with employees, others will be more universal in their nature and attractiveness.

1. Freeing up funds and enhancing net pay

Implementing Pension Salary Sacrifice and Bonus Waiver

Most employees need to be automatically enrolled in a pension scheme. When an employee makes a pension contribution, they will get tax relief, but the employee and employer will pay NIC on the employee pension contribution. However, NIC savings can be achieved by the employee giving up pay equivalent to their gross employee pension contribution and, in exchange, the employer making an additional contribution on top of their normal employer contribution.

This can also be applied to bonus waivers where employees decide to waive part or all of their bonus in exchange for an additional employer pension contribution.

For example, if £1,000 is sacrificed, employee NIC savings of 132.50 or £32.50 and employer NIC savings of £150 can be achieved – reducing employer costs and increasing employee net pay. This needs to be implemented carefully to be compliant and manage interactions with pay and reward, but it is an arrangement many employers in the UK have implemented.

Revising car and travel strategy

Embedding sustainability in to Reward Strategy is not easy, particularly when looking to make cost savings and not impact employee reward. However, an area where this can be achieved is by offering employees the opportunity to participate in Electric Car / Electric Bicycle salary sacrifice.

Employees can save tax and NIC (with HMRC confirming wholly electric cars will have a BIK percentage of 2% up until the end of 2024/25 tax year), and the employer can make significant savings too on NIC (and Apprenticeship Levy) by introducing these arrangements, as well as helping make their reward policy more flexible and aligned with carbon and sustainable ambitions. 

Alongside this, it can help reduce costs whereby employers will have more control over business travel costs and can reimburse at the 5p per mile rate for electric company cars, rather than higher rates for own cars. This may also reduce costs for employees of private travel, particularly where using an electric bicycle rather than a car.

2. Freeing up funds and enhancing reward

Training and Apprenticeships

Apprenticeships have been a major topic of conversation since the Apprenticeship Levy was introduced. Looking at training costs and how apprenticeships are used could create significant savings given that where employees are on a qualifying apprenticeship:

  • The employer uses their apprenticeship levy pot or, can receive co-investment support up to 95% of the costs of the apprenticeship training
  • The employer does not pay employer Class 1 (secondary) NIC of apprenticeship pay where the apprentice is under the age of 25
  • There are grants and other financial support available for certain apprenticeships and training (kick start schemes etc).

This is not just for school leavers and can help throughout the organisations – it can therefore be a useful area to look at to design progression and training approaches to help retention, particularly where employees move from one apprenticeship to another as they grow their role in the organisation.

Trivial costs and employee reward

Organisations often are not aware that HMRC has tax/NIC exemptions in place for:

  • Trivial benefits – e.g., £50 hamper for Christmas or birthday gifts;
  • Providing food and drink on employer premises;
  • Annual functions available to all

By being aware of these, employers can manage costs and enhance rewards given as there will be no tax/NIC to pay. This could help with retention and recruitment, particularly where:

  • Looking to build on office culture by providing drinks/food on certain days;
  • Putting in place an annual Christmas/summer party up to the £150 per head limits to help employees socialise
  • Providing gifts for Christmas/birthday etc

3. Freeing up funds – alternatives

Alongside the above, thinking about standing out from the crowd is important here too to help enhance growth and mitigate costs. Ideas may include:

  • Using Holiday as a Bonus – this may be where you look at agreeing on performance benchmarks for employees to receive an extra (say) 5 – 10 days holiday per year over a three-year period. This holiday can then be used in Years 4 and 5 or potentially cashed in / exchanged.
  • Sacrificing for Green Energy Alternatives – although a potential upfront cost for the employer, it may help delay NIC payments to HMRC as Class 1A NIC will be due once a year in July after the end of the tax year rather than on a pay period by pay period basis. This could include EV Charging Units, Heat Energy Pumps and Solar Panels. Another alternative here is to provide green energy loans to employees but this would increase costs in the short term.
  • Employee expenses - Separately, employers may want to consider looking at making scale rate payments up to HMRC’s approved limits for food and drink when employees are travelling to temporary workplaces to reduce administration and better manage costs, as well as simplifying the expense process for employees. This could reduce costs and provide more consistency across the organisation, with employees no longer expensing expensive meals but instead receiving a fixed scale rate.
  • Sacrificing for Holiday – giving employees the opportunity to exchange pay for more annual leave can help reduce costs and ensure reward is flexible for employees. Employers may also want to go further by introducing salary sacrifice for the purchase of an actual holiday – flights, hotel etc. Again, although it will not necessarily create significant cost savings for the employer, more a delay in when the NIC is payable, it can help retain and recruit employees as well as make holiday costs more affordable. Using current online travel portals is a good starting point here.

There are many other ideas too including having better policies for relocation, temporary secondments, paying for tax/NIC free benefits like professional subscriptions/home working allowances etc (mindful of the Optional Remuneration legislation though) etc…

Next Steps

This article has focused on freeing up funds. There are many other ways to incentivise and manage costs, including share plans (EMI, SAYE, unapproved), employee ownership trusts, bonus structuring and looking at what benefits work best for employees (car parking, loans, canteen, professional subscriptions etc)

It often needs a broader discussion to get right, and we are well placed to help, so please do get in touch.

Get in touch

If you have any questions regarding the above, please get in touch with us using the 'Get in touch' form or contact Ian Goodwin below. 

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