Insights

Rising costs are hitting almost every household hard and if you are an employer, you might be considering how to give your staff some extra financial support. It’s not about doing them a kindness, although that’s clearly very worthwhile, but it could be good for business. For instance, helping to increase employee loyalty. Very importantly, it could also reduce stress levels and ensure that employees are not preoccupied by money worries and become less productive as a result.

There are lots of implications if you decide to help your employees financially because, depending on the circumstances, a one off payment could actually create more trouble for them in the long run. For instance, if you have employees on universal credit, which is means tested, any bonus payment could be heavily reduced by automatic deductions. This is what happened to Greggs employees when they gave them all a £300 bonus; some workers on universal credit only saw £75 of the bonus.

There are other perhaps more beneficial ways to help employees ease the cost of living crisis - here are some options to consider:

Increase wages

This is the most obvious way to support employees, but it will mean that tax, national insurance and pension contributions could also increase. It may also impact the amount of universal credit received.

Here is an example to illustrate the effect of a wage increase:

Jenny, 35, is a lone parent. She works 25 hours a week earning the minimum wage. At £9.50 per hour there is no tax or NIC applied to her earnings of £237.50 per week. Because Jenny is on a low income, in a month where there are five pay days in the universal credit assessment period, she receives universal credit of £286.93.

If Jenny got a pay rise or increased her hours to make an extra £25 per week, based on current rates she would receive £236.91 per universal credit assessment period. There is also tax and NIC at to factor in at £6.81 per week. From her £125 increase in terms of gross earnings during her universal credit assessment period (assuming there are five pay days in that period), the true value of the £125 increase to Jenny is only £40.93.

One-off bonus

If you cannot afford an ongoing increase in pay or hours, you could top up an employee’s pay with a one-off cost of living payment. Before offering this consider the implications for any lower paid employees who may be either receiving universal credit or applying for support. If a lower paid employee is applying for universal credit, a one-off bonus could mean that their income in the assessment period becomes too high and invalidates their claim. Equally, someone who is already getting universal credit may find it affects their monthly payment as shown in the example above.

Changing pay frequency

Rather than increase pay, it may be helpful to simply increase the frequency of payments instead. Most people are paid monthly which is efficient for payroll purposes, but it might not be ideal for every employee’s cash flow requirement. Weekly or fortnightly payments may be preferable. Care would need to be taken to minimise the impact on any benefit payments, for instance, trying to time the change-over to avoid a mid-pay period for benefit calculations. For weekly payments, there may be differences between universal credit payments because some periods will be based on 5 working weeks and employees will need to budget for the fluctuations. During some 5 week periods they may not receive universal credit payments, but over the course of a year the amounts will level out.

Interest free loan (beneficial loan)

A cheap or interest free loan could be helpful to employees, allowing them to pay for expensive items like season tickets. Many firms already offer this benefit to employees and provided the loan amount does not exceed £10,000 per tax year, it is not a taxable benefit.

Salary advance

Some employers may be willing to offer employees a salary advance as a one off rather than giving them a loan. For payroll accounting purposes a salary advance is classed as a payment on account. It is reportable by the employer and taxable on the employee at the time the payment is made. Bear in mind that this would also impact universal credit payments as the income for that period would be unusually high.

Non-taxable benefits in kind

In addition to a loan, there are other non- taxable benefits that may be helpful to low income employees. Being non- taxable, they are not treated as income for universal credit. Useful benefits include wellbeing services like counselling, discounted goods (offered at the price paid by the employer), free or subsidised meals.

Salary sacrifice

A salary sacrifice scheme could help employees increase the affordability of some items e.g. mobile phones and laptops, gym memberships, and could also help with pension savings.  Caution is needed for employees who are at or near the minimum wage threshold because they could miss out on other benefits due to the effect of it increasing their gross salary.

Impact of increasing mileage

In a previous article we highlighted that due to the high cost of petrol, the 45p mileage rate may be leaving workers out of pocket. Some employers might be considering increasing this, but it will have tax implications as the additional payment is treated as a benefit in kind. Find out more about the impact of increasing mileage payments here.

If you would like advice about payroll management services please contact us via partners@rjp.co.uk