What the Budget and Employment Rights Bill mean for payroll
The increase to employer National Insurance (NI) was widely billed in advance of the Autumn Budget, yet the scale of the changes came as a surprise.
Although the increase to the headline rate of employer’s NI, from 13.8% to 15%, had been somewhat anticipated, the lowering of the secondary threshold (the level of earnings at which employers start to pay NI) from £9,100 to £5,000 had not.
Indeed, it is this second change that will likely have a bigger impact on the amount of NI paid by businesses.
Another change was the increase in the National Minimum/Living Wage.
For individuals aged 21 and over this will increase by almost 7%, whereas for individuals aged 18–20 there will be an even larger increase of 16%.
Putting these two measures together, many employers are likely to be facing a very significant increase in their employment costs.
The cost of employing an individual earning National Minimum Wage, for example, could increase by more than10% of payroll, whereas for an employee on UK average earnings the equivalent increase is around 2.5%.
Mitigating impact
Given these significant changes, employer attention has turned to what actions they can take to help manage their cost exposure and how that might impact their payroll implementation.
A first step in this exercise requires a holistic view to employee reward – rebalancing away from pay and into other benefits that do not attract employer NI.
Directing more reward into pensions is one obvious way of reducing the impact of higher NI rates.
Alongside core pension contributions, employers may also consider bonus sacrifice and/or a shared cost additional voluntary contribution (AVC) as ways of reducing NI contributions for both employer and employee.
Equally, those businesses already using existing salary sacrifice arrangements (and sharing some of the NI savings in the form of employee contributions), will need to consider whether these need to be revisited in light of the higher savings.
Also worth considering are approved non-financial salary sacrifice arrangements such as electric vehicles, cycle to work and technology schemes.
Employer considerations
Employers should remember that salary sacrifice arrangements cannot generally be used by those earning at (or close to) the National Minimum Wage, and so there are limitations to the effectiveness of salary sacrifice for some organisations.
Furthermore, it is a well-known fact that younger workers do not place £1 of value on a £1 pension contribution for example.
Any business looking to place a greater emphasis on benefits as part of their reward package will need to carefully communicate the value delivered by these benefits.
Irrespective of the nature of the benefit, employers will want to ensure that employees understand and engage with the benefits provided, as well as appreciating the value.
Our recent research showed that providing an easy-to-understand total reward statement (TRS) can increase employee appreciation of the value of benefits by 48%.
This can also be extended out to cover non-financial benefits, such as flexible working and family-friendly policies.
A changing landscape
Responding to the Budget isn’t the full extent of the changes that employers will be looking to address over the coming year.
There is also the Employment Rights Bill – one of the most significant single items of employment legislation to be published – to consider.
Among the changes to employment law stemming from the Government’s New Deal for Working People are enhanced rights for workers around flexible working, and the extension of existing employment rights – including rights to sick pay, and to protection against unfair dismissal – so that they apply from ‘Day One’ of employment contracts.
Not only does this directly impact employee reward and benefits, and how they are implemented in payroll, there’s also the possibility of penalties from regulators for non-compliance – with corresponding financial and reputational implications for those who fall short.
All resulting in a set of powerful incentives to take a proactive approach.
Reporting environment
Organisations of more than 250 employees will have well-established gender pay gap reporting processes but the proposed extension to ethnicity and disability reporting will bring new challenges for many.
Not least how to persuade employees to provide this information, how to categorize ethnicity and disability and how to explain apparent pay gaps which may be driven by a lack of available information or a very small cohort of the workforce.
Although there are many areas of uncertainty including timing, transition periods, enforcement, benchmarking and penalties for non-compliance, HR teams can – and should – start preparing themselves for these new reporting requirements.
Preparations should include a review of existing employee data as well as an initial analysis of the scale of any pay gaps and an understanding of what is driving the gaps.
Employers may also want to consider whether the existing HR team is equipped to deal with the enhanced obligations or whether to investigate outsourcing of the analysis.
Ensuring that your people are paid the right amount and at the right time might seem a simple enough task, but rules around pay and pensions are complex and nuanced.
At a time of significant change in the requirements around employee reward, it is essential that businesses don’t find themselves inadvertently falling foul of these rules.
All in all, there’s never been a more important time to make payroll a priority.
To ensure that your payroll model is aligned, compliant and prepared for new disclosures, please contact Mark Jones.
In partnership with Isio
A forward-looking approach to employee benefits, creating value for today and tomorrow. Helping you and your employees get the most from their benefits.
