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Flexible employee benefits during COVID-19 lockdown

Richard Davey Richard Davey

Flexible employee benefits were increasingly attractive to staff in recent years. But how have the current circumstances affected these schemes, asks Richard Davey?

Commonly known as 'salary sacrifice' schemes, flexible employee benefits allow employees to give up part of their salary in return for benefit. Some of these are even exempt from income tax and national insurance

Flexible employee benefits are contractual in nature. When the employee's salary is reduced, by shorter working hours or furlough, it amends the contract of employment

For a flexible benefit to attract tax and NIC exemptions, HMRC expect that the salary-sacrifice agreement be entered into for a fixed duration of time, normally 12 months, and can only be amended in specific circumstances. These are known as "lifestyle events". Thankfully, HMRC are amenable to coronavirus-related changes being counted as lifestyle events.

Do you need a new salary sacrifice agreement?

While employees are able to change flexible employee benefits schemes during the coronavirus outbreak, this will require a new salary-sacrifice agreement.

It would be prudent for employees to review existing documentation to ensure that they have unilateral permission to change, amend or withdraw a benefit, and they should seek legal advice where there is uncertainty. Any agreed changes should be accompanied by an updated salary-sacrifice agreement setting out the effective date, making it clear that it replaces any other agreements that went before it.

Childcare voucher schemes

For all but essential workers, schools and nurseries are closed for the foreseeable future, so what are the options for employees who have childcare vouchers as a regular flexible employee benefit?

It is permissible for employees to temporarily opt out of childcare vouchers and later re-join the scheme provided they:

  • joined the scheme prior to 4 October 2018
  • make at least one salary sacrifice within each 52-week period
  • do not leave the scheme in order to use tax-free childcare
  • do not change employer.

Depending upon the rules of the flexible employee benefits scheme, it may also be permissible for eligible employees to reduce regular deductions to a minimum of £10 and later increase back to previous levels. Always check in with your childcare voucher provider before communicating any changes, as the rules of your flexible benefit scheme may have additional conditions applied.

Childcare vouchers are among a small number of flexible employee benefits that are entirely exempt from income tax and national insurance contributions. Any amount taken as cash by opting out or reducing voucher spend will be subject to PAYE and NIC, and employers will be required to pay Class 1A ERNIC on the amount taken as salary.

Cycle to work schemes

Some cycle shops have stayed open as "essential businesses". It is advisable to contact the selected store to check that they are still open.Vouchers can be redeemed online at certain stores with some retailers offering free delivery.

Holiday trading

A popular employee benefit is the ability to sacrifice salary for more holiday. The amount sacrificed is exempt from PAYE and both employee and employer NIC.

Due to international travel restrictions and the current state of lockdown in the UK, your employees' individual circumstances may change and some may ask to reverse their selections in order to enhance their take-home pay. Doing so will increase the employers salary cost and add Class1A ERNIC. For larger businesses this could become a costly exercise.

The normal obligations to ensure workers take their statutory entitlement in one year to avoid a financial penalty have been temporarily lifted. Amendments to the Working Time Regulations 1998 mean that employers may allow employees and some workers who do not have employee status, such as agency workers, and some casual and zero-hours contract workers, who have not taken all of their statutory annual leave entitlement by the end of 2020 due to COVID-19 to be able to carry it over into the next two leave-years. It is likely this may impact the future rules surrounding holiday trading in flexible benefit schemes where you allow the carry over into the next holiday year.

Furloughed employees

Furloughed employees may continue to be covered for their full benefit entitlement, providing their contract of employment is maintained and premiums are paid on this basis.It’s important that the data provided during this time reflects the full salary for everyone, and not the reduced amount that might be paid.

For furloughed employees, benefits will be calculated from the date of last attendance. For employees temporarily working reduced hours, benefits will be calculated from the date they last worked their full contracted number of hours.

However, for employees temporarily on a reduced salary, benefits will be calculated from the date that the temporary change to salary was made. For employers who are considering reducing benefits for furloughed workers in line with salary, it is essential that you seek specific benefits advice to ensure that those affected can 'grandfather' their previously accepted benefits when back to full-time employment.

Gym membership

All commercial UK gyms have been closed and most staff and personal trainers have been furloughed.

There are two types of gym membership commonly offered through flexible benefit plans:

1An annual subscription plan paid by way of a salary sacrifice on a monthly basis

2A voluntary plan where discounts and special offers are provided in a virtual marketplace and employees subscribe directly with their gym and pay for it from net pay

It is likely that salary-sacrifice gym memberships will be extended by the length of time gyms remain closed. For instance, if gyms remain closed for two months, an annual membership will be extended to 14 months.

This may be problematic for flexible employee benefits schemes with a fixed annual enrolment and pro rata costs may need to be calculated. Check with your supplier as specific conditions may apply.

Individuals who subscribe by a voluntary plan will need to speak to their gym directly to establish if refunds or temporary suspensions of direct debits will apply.

Platforms, providers and advisors

Many flexible benefit platforms are limited in their ability to create an ad hoc or exceptional benefits window without incurring significant cost, so it will be important that you engage with your platform provider to establish what they can do. Even if it is something your advisor can support, it may take time to test and launch.

It may also bring about unintended consequences if the opt out rate is high, for instance, the cost of insurance per capita may increase or new exclusions applied when individuals seek to re-join specific insurance benefits.

If you would like to discuss this in any more detail, contact Richard Davey.

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