When it comes to employee benefits, it is fair to say there isn’t a single solution that fits the entirety of the workforce. Workers’ requirements and needs vary widely, depending on age, salary, family and many other factors.
In this article, we focus on high earners as they are increasingly finding themselves in a challenging space due to the introduction of a) reductions in the lifetime allowance (LTA) in recent years and b) legislation such as the tapered annual allowance (TAA).
The LTA is a limit on the value of an individual’s pension savings (either a lump sum or retirement income) that can be taken without triggering a tax charge on the excess. The lifetime allowance for most people – for the tax year 2018/19 – is £1,030,000.
When it comes to TAA, people with a total ‘adjusted’ income (total taxable income plus the value of the employer’s pension contribution) over £150,000 may have their annual allowance for contributing tax efficiently to a pension restricted.
While those facing the issues outlined above may be deemed to be in a privileged position, due to the complexity involved it is something that can have a significant impact on these staff members. Therefore – as they are likely to be key employees – it is important employers are aware and able to assist, while maintaining their automatic enrolment duties.
Employers are now required to think outside the box in terms of rewarding their senior employees – no longer will a good salary and a generous pension contribution achieve their goal of keeping their key employees happy.
So, while nothing is going to replace the tax efficiency of a registered pension scheme, there are a few options that could be offered as further employee rewards:
- Executive financial counselling – this is employer-funded provision of bespoke individual and personalised education, consultation and financial advice, offering a much-valued service to executives and management
- excepted group life assurance – replacing registered group life provision with excepted group life assurance can help reduce the impact on the LTA in the event of death in service as it allows for lump sum benefits to be paid outside of LTA consideration
- other company arranged insurances – benefits such as income protection, critical illness cover and private medical insurance could provide employees with peace of mind. Company schemes can generally be obtained at competitive rates with employees only required to pay their marginal rate of tax on the premium (assuming the insurance is classed as a benefit in kind)
- flexible benefits – employers could offer employees the opportunity to design their own reward package, with a view to remaining within their annual allowance, with many flexible benefit portals now available
- employee health and wellbeing – senior employees are likely to be in a highly stressful role and could benefit from initiatives to boost their health and wellbeing. This could include health screening and mental health resilience/awareness training, for example.
Pension contributions still provide a highly tax-efficient environment for employees to save – it is difficult to replicate that benefit elsewhere. Employers therefore need to be creative in how they incentivise their key employees without them incurring a significant tax burden.
There is an increasing appetite from employers to support their employees with their health and wellbeing. Not only would this be valued by the employee and help the employer retain their best staff, it also has a financial benefit too.
It is estimated poor mental health costs the UK economy between £74 billion and £99 billion a year. Within this, Deloitte analysis shows the cost to employers is between £33 billion and £42 billion. It is therefore firmly in the employer’s interest to pursue support in this area as a benefit in addition to salary and pension.