Payroll World Blog

Salary sacrifice: businesses must be diligent when implementing schemes

Paul Tooth, general manager at Sage HR & Payroll

Salary sacrifice should be part of an organisation’s armoury but there are some key considerations that firms need to take into account

Nick Clegg’s announcement that measures will be taken in the New Year to improve transparency and curb excessive pay packages for executives has put remuneration firmly under the spotlight. At a time when cost of living has reached unprecedented heights and salary increases have stalled, employees are demanding more support from their employers. It comes as no surprise then that salary sacrifice has shot up the corporate agenda, but if they are to reap the full benefits then businesses must do their due diligence before implementing such schemes.

Back to basics: How earning less can give more

Schemes that give employees the opportunity to forego some of their salary in return for other – often more appealing – non cash benefits, significantly reduces the tax liability for organisations and their employees. By paying for these benefits out of their gross salary, an employee can reduce their liability to income tax and national insurance. In turn, the employer also benefits through lessening its National Insurance responsibility; the savings from which can either be reinvested in other schemes or absorbed back into the company’s P&L.

Tax relief?

Salary sacrifice initiatives provide a route to ‘bump up’ savings that offer substantial benefits in periods of economic instability for employees. Indeed, by entering into a salary sacrifice arrangement that could keep earnings under £100,000, high earning employees will not only significantly reduce their personal tax liability, but can also protect some of their £6,475 personal allowances if they hit ‘the sweet spot’ – earning between £100,000 and £112,950.

Yet while sacrificing salary can unquestionably form part of an effective tax planning strategy, the benefits of salary sacrifice do not extend to everyone, nor will they apply to those earning over £150,000 per annum. This clearly reiterates the need for employers to be vigilant in ensuring any salary sacrifice arrangement is fully compliant with HMRC guidelines and beneficial for both the organisation and its people.

Beyond financial gain

The tax savings offered through salary sacrifice are indisputable, yet the benefits are more than just financial. These schemes are also an effective way of boosting morale among your workforce as they show the business cares about its employees’ remuneration.

Employers need to invest time to educate their people on the benefits and drawbacks associated with salary sacrifice. Not only can this help to drive employee uptake by helping to show how the business has invested in its people, but also gives employees the flexibility to select those tax breaks that will benefit them long-term.

Businesses should also look to invest in payroll software that takes care of PAYE regulation and can accurately track what has been paid against what has been saved. This means firms can track a running total of the tax savings made, and also benefit from administration and calculation efficiencies that will reduce the burden on payroll.

RTI consultation – The result is a rubber stamp

Matt Boyle, campaigner at Research for PAYE

Well HMRC has now published its summary of responses to Improving the operation of Pay As You Earn (PAYE): Collecting Real Time Information.

The introduction of Real Time Information (RTI) is a major change to the business processes surrounding payroll as operated by some 1.1 million employers and it is interesting to note that this document runs to 15 pages, four of which detail the names of those that contributed to the consultation and two of which consist of the title and the Index.

The findings are unsurprising to many in that they would appear to support the original proposals of HMRC, but one has to question if such a small survey really does reflect the views of those involved in the operation of payroll.

One surprising comment in the document is that “The majority of employers told us that they are unable to record the number of hours worked during a pay period with any degree of accuracy.” Unfortunately we are not told who these “majority” are or given any statistics to support this view. This would seem to imply that the vast majority of employees are not paid on an hourly rate and that payroll is not effective in computing gross pay based on a knowledge of hours worked. This information is based on 187 formal responses some of which came from organisations not actually involved in payroll processing on a day-to-day basis.

Many issues

This “finding” appears to means that employers will now have to make a report of “Hours worked will be reported in bands of normal weekly hours worked broadly reflecting the current Tax Credit legislation. These bands will be: up to 15.99 hours, 16-29.99 hours, 30 hours or more, or ‘other’, which will be used when these categories do not apply, e.g. for pension payments.” This means additional information that employers will have to factor into their business processes for RTI operation.

We are told that “Analysis shows over 90% of employees are paid through a Bacs channel” but again we do not know if this is 90% of 10 or 90% of the 30+ million employees in the UK.

There are many other issues that need to be properly reviewed, which will be discussed at a later date, but it would seem that we are stuck with this simple “rubber stamp”.

Is it acceptable that such a major change to the operation of payroll for so many employers and payroll teams is apparently given such a poor analysis on the effects of the proposed implementation?

Riots in the UK: Business travellers caught in the middle

Readers in the UK will be very aware of the riots that took place across London and other major cities recently. The violence and speed with which it escalated, spreading across the capital and other parts of the country, was alarming.

For those working in London, whether commuting into the city on a regular basis or making ad hoc visits, the riots caused special challenges. During the week of rioting, public transport routes were disrupted and roads were closed, making travel around and out of the city more difficult and even dangerous. Buildings were damaged, looted and in some cases, set on fire, so many shopkeepers as well as owners of bars and restaurants boarded up their properties to avoid a similar fate.

Duty of care
Employers have a duty of care to ensure they are not placing their staff in harm’s way when these kinds of incidents happen, but what is the best way to help business travellers in all this chaos? With rioting beginning in daylight hours, during the afternoons, workers were sent home early and advised to avoid trouble hotspots. And in those situations it is crucial that worried employees can change their travel arrangements quickly and easily. Mobile apps allow users to do this on the go.

The last thing you want to be doing as a business traveller is getting stuck in a trouble hotspot where public transport is shut, roads are closed down and rioters are claiming the streets. In this uncertainty, it is usually best to err on the side of caution and cancel any non-essential meetings or work engagements to opt for calls or video conferences instead.

Mobile apps
Mobile travel management apps allow companies to keep tabs on where their employees are -something that is particularly useful in times of crisis. Through this kind of app, users can share their travel itineraries with friends and family, meaning those closest to them will have visibility into their plans, as they adapt to changing circumstances.

While we are relieved the violence has subsided quickly and hope that those communities affected by the riots continue to recover, it is necessary to be as prepared as possible in case tensions ever flare up again and business travellers are caught in the middle.

David Vine is senior director, compliance at Concur Technologies

Concur UK

Payslips – how do you want yours?

Over the last year or so we have seen a significant increase in the use of electronic payslips and according to a survey from the Chartered Institute of Payroll Professionals (CIPP), electronic payslips were the most popular method of payslip presentation in 2010. However, it seems that for some people nothing beats the printed word and they still wish to receive the traditional paper payslip.

So what does this tell us? Well to me this shows that the delivery of payslips simply echoes the thirst for multi-channel communications and, above all, choice. Today we live in a society where we expect to be able to choose how we receive our bank statements, phone bills, promotional communications, receipts, so why should payslips be any different?

Of course from an employer’s point of view there are many advantages to delivering ePayslips. For a start the hike in Royal Mail charges earlier this year could be enough for many organisations to switch to electronic payslips. Not only can ePayslips have a significant financial impact but without the requirements to print, seal, batch and distribute they will also increase staff efficiency. As employees are able to review and print previous payslips they can also significantly reduce the amount of queries that payroll departments have to deal with so they are free to do the important stuff.

So as a forward thinking payroll department are you offering your employees the choice they expect? Payroll software today can offer you this flexibility so your employees can view their payslips online and print them off whenever they wish, view them on mobile devices or have them mailed as the traditional paper based payslip.

Adele Bennett is marketing programmes manager at Sage
Sage payroll software

The road to RTI is paved with great intentions, but...

HM Revenue & Customs is one of the brightest government departments with a reputation for utilising IT in positive ways. Having met department representatives recently at a senior level about Real Time Information (RTI), they impressed me. However, three areas cause concern:

1. The amount of non-payroll information demanded through RTI
2. A single view of technology that has yet to recognise how technology has changed for many
3. The timing and speed at which organisations can change their systems through IT providers.

As with all idealistic schemes, the principle is fine. VAT, for example, has now been transferred to electronic submission successfully. RTI supporters say, then, it’s a natural development to move to centralised deductions. However, as fine as the principle is, the business impact of introducing RTI is still potentially onerous and expensive.

Mandated
When I asked HMRC if it had done cost benefit analyses for employers or return on investment (ROI) modelling for business, it was inclined to use the word ‘mandated’. This attitude is reflected in the type and quantity of information needed. The information required in the first consultation document for the RTI return included 100 separate items. However, this is currently around 120, and growing! And the nature of items included will have the effect of ensuring that the HR and payroll systems will need to be far more closely integrated, with huge organisational ramifications.

More importantly, some areas of technology have moved on from the initial assumptions held at HMRC. We now have a plethora of other ways that organisations run HR and payroll functions, including cloud computing for example. Outsourced payrolls too, used by so many, will now need to get closer to internal HR.

Out of the blue, BACS has been decided upon as the only system for information transfer but we believe this might have to change, as EDI will rear its head to nullify the risk of having just one system. Though none of these factors have been thought through properly at all.

Time is short
It’s the timescales that make this so scary. Large employers are ‘mandated’ (that word again) to comply by January 2013, medium-sized organisations by April and SMEs August that year. If one looks at users of large systems such as PeopleSoft, Oracle or SAP there could be over 100,000 employees in multiple locations being paid with information from numerous HR systems! To change this is time is very tight.

So within super-tight timescales, organisations’ IT suppliers have to specify system changes, although these can’t happen until HMRC finalises its specification. Once that’s agreed suppliers have to rewrite large chunks of internal systems – which might take 12 months! The main IT supplier companies don’t just do HR and payroll, and are not just concerned with the UK – their priorities are global.

Add to this that they are unlikely to make any revenue from RTI work as the forced changes are probably covered by existing user agreements, and you start to see just how worryingly tight timescales are. These IT suppliers might be doing RTI work for every other UK organisation, and have resource issues when it comes to your organisation!

Get ready
So the theory IS good, but in the real world one has to take account of the considerable practicalities. At Crocus Consulting, where we implement payroll systems for some of the largest corporations in the UK, our advice is threefold. Firstly, that organisations plan the integration between relevant systems, with their IT advisers, extremely carefully. Secondly, they need to listen for IT supplier advisories from companies such as Oracle PeopleSoft. Lastly, allow sufficient time for quality testing once the RTI work is done. We have established an advice-line for organisations seeking help with these strategies.

RTI, therefore, is a decent idea. However, the timescales could mean that it will be worse for HR and payroll departments than anything experienced before. The compliance costs come straight off the bottom-line, yet deliver few employer benefits. Regardless of this, organisations must now invest in RTI compliance or risk underestimating timescales. Only by starting now can they ensure they get timely advice and minimise the costs.

Peter Jenkins is a director at Crocus Consulting

Crocus Consulting

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