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14 Feb 2019

How to tackle the benefits issues your high earning employees can face

Over the last few years, HMRC has zeroed in on executive pay. As a result, it’s becoming increasingly confusing for high earning employees to know what they can and can’t do and; for employers to offer a competitive reward package that doesn’t result in a tax headache for these employees.

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The introduction of the government’s austerity measures and high profile tax avoidance cases has had an effect on executive rewards. There’s been a continued squeeze – especially on the generous tax breaks associated with pensions.

Before you can tailor a reward package to high earners and help these employees understand the accompanying tax issues; you yourself will need to take into consideration the new and often confusing changes to pension rules that could affect them. Such as:

  • The reduction in the Lifetime Allowance
  • The tapered annual allowance
  • The loss of the personal allowance.

Who are your high earners? 
You know how much you pay your senior employees in salary, bonus, benefits in kind etc. But it’s unlikely you have their full picture. Complex pension rules encompass all earnings and they may have rental income, dividend payments, interest on savings, self-employed earnings or income from other sources. 

Understand their needs 
High earners will be looking to save enough to maintain their standard of living after retirement. But they’ll be restrained by lower pension allowances, restricted tax relief and other complex rules. Current rules mean the highest earners are limited to saving just £10,000 every year into their pension. With this limit, they’ll have a hard time saving enough money for retirement and may experience a drop in their standard of living.

Many employers mistakenly assume their higher earners are financially sophisticated enough to take care of themselves, or have an adviser in place to help them. The reality is that most don’t and they don’t have the time to give these issues the attention they deserve. Understanding their tax issues will make it easier for you to create an attractive reward package. 

Their problem is your problem 
When done correctly, reward packages will keep your employees happy, improve motivation, increase customer satisfaction, grow competitive advantage and encourage company growth. An ineffective reward package could prove costly.

Navigating pension rules can be time-consuming for your high earners, but not paying attention could result in a tax bill. Despite this being a personal tax matter, in many cases, an effective reward package can help them avoid this issue. Not offering to help can result in disengagement among your company’s high earners. This can seep into the rest of the business, undermining the reward strategy that you’ve worked so hard to implement. 

Two building blocks for a good reward package 

  1. RAISE AWARENESS:

Providing relevant information to those affected should be your first step. Offer instructions, guides and signposting to further information and tools. It would be wrong to assume all your high earners have personal financial advisers. But remember, these issues may only affect a small population and communicating to the whole workforce may be inappropriate. 

Offer face-to-face support, and partner with financial education experts to support your higher earners. For many, this will be the first time they realise they’re affected. Helping them get smarter with their money and a potential savings on hefty tax bills is something they will thank you for. 

 2.  PROVIDE OTHER SAVINGS OPTIONS:

Many employers have chosen to pay cash in lieu of pension payments to high earners impacted by the annual allowance, because they’re not aware of an alternative. Money intended for retirement is then spent like salary - risking a retirement income shortfall.

Payments could be redirected to an alternative individual savings plan (such as an ISA). These payments wouldn’t qualify for tax relief, but can help fund retirement or other long-term saving goals.

It’s important to build a reward package tailored to your high earners and ensure it remains attractive. Your high earners will appreciate one that offers access to wider savings alongside their pension, managed in one place and the support to be smarter with their money. 

This article is provided by Hargreaves Lansdown. 

 

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