Employee benefits - how to pick the right ones for you
We all value flexibility in our lives – whether it's choosing when to have our online shopping delivered, when to watch our favourite TV shows and, in many cases, how many days a week we work. Flexibility in the workplace is very much back on the agenda, so why should employee benefit packages be any different?
And in today's straitened times, getting the most from your employer is key. Since January 2009, average weekly earnings have fallen by 8% in real terms, according to the latest CIPD Megatrends report, meaning extra perks are worth more to our pay packets than ever before.
Typically, employers will offer a core set of benefits to employees – usually including workplace pension schemes and annual leave – as well as extra benefits that you can layer on top to add flexibility to your package, such as private medical insurance (PMI), additional holiday days and corporate gym memberships but you'll usually have to pay for them.
How – and how much – you pay for them depends on the type of scheme your employer offers. Some will offer formal 'flex' options, where the benefits are operated through salary sacrifice, which involves employees swapping a proportion of pre-tax salary each month in return for a non-cash perk. The second option is a voluntary benefit scheme, where employees pay separately (usually through cash or via a points-based allowance) for extra perks, to take advantage of an employer's purchasing power.
While they could boost your overall package, how much are they actually worth? HR directors estimate that benefit packages are worth 11.5% of an employee's basic pay but that employees undervalue their perks by 5.4%, according to recent research from employee benefit specialist Thomsons Online Benefits - so it's well worth looking into them.
Private medical insurance
PMI ranks as one of the most popular perks, although it is by far the most expensive – especially if you add dependants on to a policy, too. Many employers will take out a group scheme, which could be up to 50% cheaper than if you bought it independently but premiums can still be eye-watering.
Jack Curzon, scheme design expert from Thomsons Online Benefits, says that a typical policy can set an employer back around £500 annually, but expect that to triple if you add dependants. PMI can either be paid for via salary sacrifice, or will be offered as a benefit in kind by your employer, which means you won't pay outright, but you will pay tax on it unless you're a lower paid employee.
PMI generally covers treatments that would usually be available on the NHS but typically doesn't cover any existing medical conditions, so check on the policy before you buy.
Cashback health plans
Many employers will offer the option of a health cash plan either in place of, or alongside, PMI. It works like an insurance policy – you pay a monthly premium, and the health cash plan will cover the treatments you need after you've had them.
It tends to be more suitable if you only require occasional trips to healthcare professionals such as the dentist, physiotherapist or optician. It's a popular work perk, and costs employers much less than PMI – it usually costs between £10 and £80 a month, depending on the level of cover.
However, the plans often have different cover limits, so it can be hard to compare them.
Other health-related insurance plans such as life cover and critical illness vary massively depending on age and cover limits, and premiums can swing from between £10 and £100 a month. As an employer can usually negotiate a discount, it usually works out cheaper than taking out a policy independently.
After PMI, buying additional holiday ranks as one of the most expensive perks. An extra week of holiday works equates to paying five 260ths (the number of working days each year) of your annual salary, which equates to around 2% of basic pay, according to Nick MacDuff, senior flex consultant at professional services consultant Towers Watson. Assuming a salary of £20,000, buying an extra week will set you back £384.
Tax-efficient perks: childcare vouchers
There are many tax-efficient flexible benefits too, which you can buy using salary sacrifice. One of the most popular is childcare vouchers, which can save parents hundreds of pounds a year in childcare costs.
A basic-rate taxpayer can buy up to £243 of childcare vouchers each month (and a higher-rate taxpayer £124 each month) out of their pre-tax salary, only paying £165 and £72 a month respectively.
A workplace pension scheme is also one of the most popular benefits – although with the introduction of mandatory auto-enrolment, for many companies it's a core benefit – as basic-rate taxpayers profit from a 20% uplift in tax relief, as well as employer contributions
in many cases.
For example, if you choose to pay £100 into your pension each month, only £80 will be deducted, with the rest coming from tax relief. Your company could offer additional pension contributions, allowing you to save up to the maximum of £40,000 tax-free a year, usually paid for via salary sacrifice.
Cycle to work
The government-backed cycle to work scheme also works via salary sacrifice and is a useful option if you live close enough to work to commute by bike. In essence, your employer will buy a bike of your choice up to the value of £1,000 – although Curzon says
the average value is around £700 - and you will pay that back over 12 months. Then at the end of the 12 months, you pay a 'fair market value' to own the bike outright, which is usually a negligible amount.
In addition, employers can use their size to negotiate discounts with gym groups to offer cheaper gym membership to employees – the discount can typically be between 20 to 30%, which could mean anything from between £10 and £100 each month. But considering that budget gyms now offer monthly subscriptions for as little as £14.99 a month, it might not be as attractive as you first think.
Employers can also use their corporate muscle to negotiate discounts with retailers. Some companies offer cheaper discount cards such as Tastecards, cheaper iPads and smartphone contracts, for example.
But while it's tempting to make full use of all the perks on offer, work out how much the individual benefits are worth on their own, and whether you could negotiate a better discount on some of them yourself. This especially applies to lifestyle perks such as gym memberships and insurance plans. Financial protection website Unum offers a helpful calculator called the 'Perkulator', which adds up all your benefits and tells you how much your package is worth if you're unsure.
The best financially valuable benefit is increased pension contributions, says HR consultant Ruth Cornish, although she admits that additional holiday can be of huge emotional value. "Most employees tend to favour cash and gym as an option if they are younger but the more variety the better, especially if you have a mixed workforce. The thing about flexible benefits is that they provide the opportunity for every employee to choose what they value most," she adds.
It's up to your HR department to communicate the benefits and tax implications of workplace perks but you can also work out how to maximise what is on offer.
Iain McMath, chief executive of Sodexo Benefits and Rewards Services, advises listing the things that you deem most important: is it extra holiday, or knowing that your family has private medical insurance cover? "Think about your age group and your lifestyle, and look down the list of benefits and see which are applicable to you," he adds. If you are unsure, talk to your line manager. "They know you the best and understand what pressure you are under," he says.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
Private medical insurance
PMI allows you to skip the NHS waiting list and arrange treatment at a time you choose. With most PMI policies, you pay a monthly premium (the older you are, generally the higher premium) and the policy will then pay out, up to specified cover limits and after an agreed excess, for any treatment you might need. Not all conditions are covered by PMI and you get what you pay for: the more cover you want, the higher your premium will be.
A special government scheme operated through employers that allows you to pay for childcare from your PRE-tax salary. The vouchers cover childcare up to 1 September after your child’s 15th birthday (16th if they are disabled) and can be used at any registered and regulated nursery, playgroup and for nannies, childminders or au pairs.